www.thalesgroup.com

2017 Registration Document Including the Annual Financial Report TABLE OF CONTENTS

CHAIRMAN’S FOREWORD 2 OVERVIEW OF THE GROUP 3 KEY FIGURES AND HISTORY 4

1. 2017 FINANCIAL INFORMATION 6

1.1 Management report 8 1.2 Consolidated financial statements 35 1.3 Parent company management report and financial statements 84

2. BUSINESS REVIEW 120

2.1 Operating segments 122 2.2 Research and innovation 130 2.3 Relations between Thales and its subsidiaries 133 2.4 Information about major operational subsidiaries and manufacturing sites 135

3. CORPORATE GOVERNANCE 138

3.1 Composition of the Board of Directors at 31 December 2017 140 3.2 Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance 148 3.4 Corporate management and Executive comitee 168 3.5 Compensation of directors and senior corporate officers 169 3.6 Incentives and profit-sharing 172 3.7 Statutory auditors 173

4. COMPANY AND SHARE CAPITAL 174

4.1 General information about the Company 176 4.2 Share capital and shareholders 177 4.3 Related-party agreements 189 4.4 Stock market information and financial communication 193

5. CORPORATE RESPONSIBILITY 198

5.1 Human resources information 200 5.2 Environmental information 217 5.3 Social Information 231 5.4 Report by the Independent third party on the consolidated human resources, environmental and social information included in the management report 240 5.5 Table of reconciliation (Articles L. 225-102-1 and R. 225-105-1 of the French Commercial Code) 242

DECLARATION FROM THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT 245 EUROPEAN CROSS-REFERENCE TABLE (ANNEX 1 OF THE EUROPEAN REGULATION NO. 809/ 2004) 246 CHANGES MADE TO 2017 REGISTRATION DOCUMENT STRUCTURE 250 ANNUAL FINANCIAL REPORT RECONCILIATION TABLE 251 2017 REGISTRATION DOCUMENT INCLUDING THE ANNUAL FINANCIAL REPORT

This Registration Document was filed with the French financial markets authority (Autorité des marchés financiers, AMF) on 30 March 2018, in accordance with Article 212-13 of the AMF General Regulations. It may only be used in support of a financial transaction if accompanied by an offering circular authorised by the AMF. It was drawn up by the issuer and its signatories accept liability. The English language version of this report is a free translation from the original, which was prepared and filed with the AMF in French. All possible care has been taken to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or opinions expressed in the original language version of the document in French take precedence over the translation. In accordance with Article 28 of Commission Regulation (EC) No. 809/ 2004, the following information is incorporated by reference in this Registration Document: • the consolidated financial statements and corresponding audit reports presented on pages 29 to 80 of the 2015 Registration Document filed with the AMF on 31 March 2016; • the Group’s financial information, key figures and management report, presented respectively on pages 5 and 8 to 28 of the 2015 Registration Document filed with the AMF on 31 March 2016; • the consolidated financial statements and corresponding audit reports presented on pages 27 to 71 of the 2016 Registration Document filed with the AMF on 5 April 207; • the Group’s financial information, key figures and management report, presented respectively on pages 4, 5 and 8 to 25 of the 2016 Registration Document filed with the AMF on 5 April 207. The omitted sections of these documents are either irrelevant to the investor, or addressed elsewhere in this Registration Document.

2017 Registration Document — THALES 1 CHAIRMAN’S FOREWORD

“2017 was another record-breaking year for Thales. The Group exceeded all its annual financial targets. As expected, order intake remained high. It was comparable to the 2016 level if we remove the exceptional Rafale contract for India that was booked in September 2016. The Group enjoyed significant commercial successes. In the transport segment, they include the modernisation of the signalling for one of the main railways in Egypt as well as the signalling of the future regional express train that will link Dakar to its airport. In the defence and security segment, the Group booked several major projects for both the French and UK armed forces. Space was the only activity that experienced a slowdown in order intake reflecting the impact of the telecommunication satellite operators' wait-and-see attitude and a high basis of comparison in the institutional market. For the second year in a row, organic sales growth exceeded 5%, powered by all our businesses. This solid performance reflects both our continued strong growth in emerging markets and stepped-up organic growth in mature markets, which reached almost 6% in 2017. At 9.8%, the highest level ever achieved by our Group, operating profitability was at the top end of the range of the targets set in 2014. This financial performance is the result of the momentum in sales, our continued efforts to improve our competitiveness and the strengthening of our technological leadership in our technological innovations. It would not have been possible without the dedication of the Group’s 65,000 employees, all of whom I would like to thank on behalf of the Board of Directors. At the same time, Thales is preparing for the future and stepping up its growth strategy: in 2017, we increased our investments in R&D by 9% and bolstered our expertise in artificial intelligence, with the creation of a new research centre in that field and, in the field of big data, through the acquisition of Guavus, a pioneer in real-time big “ANOTHER RECORD YEAR data analytics. We are investing €150 million over three years to set up a cross-functional ‘digital factory’ in order to capitalise on our FOR THALES” unique portfolio of digital technologies. We are actively preparing for the acquisition of Gemalto, which is expected to close in the second half of 2018. This acquisition marks a key step in the implementation of our strategy. Together with the Gemalto management team, we have big ambitions based on a shared vision of the digital transformation of our businesses and our customers. By bringing together our talents, Thales and Gemalto will create a global leader in digital security. I am confident that this strategy will allow us to further drive profitable and sustainable growth.”

Patrice Caine Chairman & Chief Executive Officer

2 THALES — 2017 Registration Document OVERVIEW OF THE GROUP

In Aeronautics, governments, airports, airlines, pilots, AERONAUTICS crews and passengers rely on Thales to make flight safer, HELPING easier and more efficient. We do this by designing, delivering and supporting the systems that keep our skies CUSTOMERS running. From air traffic management, training and simulation solutions, to nose-to- tail aircraft connectivity and in-flight services, we enable and connect all parts of the MASTERING Aeronautics ecosystem in the air, on the ground, and in between.

EVERY DECISIVE In Space, we design, operate and deliver the satellite- SPACE based systems that help our customers to position and MOMENT connect anyone or anything, everywhere. We help them observe our planet, and help them optimize the use of our planet’s – and our solar The companies, governments and institutions that system’s – resources. We believe space is humankind’s new horizon, which will make the world go round – they rely on Thales. enable us to build a better, more sustainable life on Earth. In a world that is increasingly fast moving, In Ground Transportation, countries, cities and transport unpredictable – and full of opportunities, GROUND operators rely on Thales to adapt to rapid urbanisation they have big ambitions: to make life better, TRANSPORTATION and meet new mobility demands – locally, between cities to keep us safer. and across national frontiers. Combining a unique diversity of expertise, Our expertise in signalling, communications, fare collection and cybersecurity gives talents and cultures, Thales’s 65,000 architects people and goods the connected journey to move safely and efficiently. And no design and deliver extraordinary high matter how challenging the project, we stay by our customer’s side until the job is technology solutions. Solutions that make done. tomorrow possible, today. From the bottom of the oceans to the depths of In Defence, we are trusted at the highest levels to help armed space and cyberspace, we help our customers DEFENCE forces prepare for, achieve and maintain tactical superiority across five key markets – Aeronautics, Space, and strategic independence over any form of threat. Ground Transportation, Defence and Security – Governments rely on Thales to protect citizens, and make the world safer. to think smarter and act faster, mastering ever greater complexity and every decisive moment From designing smart sensors and advanced defence systems, to developing along the way. collaborative combat, and connecting and equipping soldiers on the digital battlefield, our systems deliver information superiority and give joint forces mastery of Whatever it takes. action whenever they face their decisive moments.

In Security, governments, institutions and large global SECURITY companies rely on Thales to design and deliver solutions that protect states, cities and critical infrastructures in an increasingly unpredictable world, with emerging cyber threats. From helping cities and critical infrastructures become safer and smarter, to securing global financial markets and protecting sensitive data, to keeping security forces connected on critical missions, we ensure integrity of the technologies that keep our world moving, staying one step ahead of all forms of digital threat and enhancing life for all.

2017 Registration Document — THALES 3 KEY FIGURES

SALES • BREAKDOWN OF 2017 SALES BY REGION € + 7,2 %* 15.8bn 2017

2016 €14.9bn

2015 €14.1bn

2014 €13.0bn * Organic growth.

ORDER INTAKE (BOOK-TO-BILL RATIO) €14.9bn 0.94 2017 1.11 € 2016 16.5bn NORTH 1.34 AMERICA 2015 €18.9bn € 1.11 1.5bn 2014 €14.4bn 9%

EBIT (EBIT MARGIN) € + 16%* 1,543m 9.8 % 2017

9.1 % 2016 €1,354m

8.6 % 2015 €1,216m

7. 6 % 2014 €985m * Organic growth.

REST OF THE WORLD DIVIDEND PER SHARE €1.0bn € + 9% 1.75* 6% 2017

2016 €1.60

2015 €1.36

2014 €1.12 * Proposed to the Shareholders’ Meeting on 23 May 2018.

HISTORY

Compagnie Française Thomson-Houston (CFTH) CSF and the professional Civil telecommunications established to exploit the patents of the US company electronics businesses of businesses sold to Compagnie Acquisition of the defence Thomson-Houston Electric Corp. in France, in the field Thomson-Brandt merge to Générale d’Électricité (now electronics business of of power generation and transport. form Thomson-CSF. Alcatel-Lucent). the Philips group.

1893 1918 1968 1982 1983 1987 1989 1997

Compagnie Générale de Télégraphie Sans Fil (CSF), Thomson-CSF nationalised. Medical imaging business (CGR) Interest in SGS-Thomson (now a pioneer in broadcasting, electroacoustics sold to General Electric; STMicroelectronics) divested. and radar technology, set up. semiconductor business merged with that of the Italian company SGS to form SGS-Thomson.

4 THALES — 2017 Registration Document WORKFORCE (EMPLOYEES MANAGED) 65,100 OTHER COUNTRIES IN EUROPE €3.4bn GLOBAL PRESENCE UNITED KINGDOM 21% €1.4bn 9% 56 COUNTRIES

SELF-FUNDED R&D FRANCE €3.8bn 24% ASIA € €2.2bn 797m 14% Excluding R&D using external funding

MIDDLE EAST €1.6bn 10%

AUSTRALIA NEW ZEALAND €0.9bn 6%

Thomson-CSF privatised; Alcatel and Groupe Industriel Marcel Dassault (GIMD) Thales acquires the transport, contribute assets and become security and space businesses shareholders. of Alcatel-Lucent and sells its Satellite businesses of Alcatel, French naval surface business Aerospatiale and Thomson-CSF to DCNS. Thales merge to form Alcatel Space, Takeover of Racal electronics in At the same time, acquisition intended jointly owned by Thomson-CSF the United Kingdom. Thomson of a 25% stake in DCNS from Thales increases its interest offer for (49%) and Alcatel (51%). CSF changes its name to Thales. the French government. in DCNS to 35%. Gemalto

1998 1999 2000 2001 2007 2009 2011 2014 2017

Thomson-CSF acquires 100% Thales sells its stake Acquisition by Dassault Aviation Launch of the “Ambition 10” control of Sextant Avionique, the in Alcatel Space. of Thales shares held by strategy. avionics joint venture between Alcatel-Lucent and GIMD. Thomson-CSF and Aerospatiale Dassault Aviation becomes a (now Airbus Group). shareholder of Thales, with a 26% stake in the Company.

2017 Registration Document — THALES 5 2017 FINANCIAL INFORMATION 1

6 THALES — 2017 Registration Document 1

1.1 2017 MANAGEMENT REPORT 8

1.1.1 Report on operations and results 8 1.1.2 Risk factors 17 1.1.3 Internal control and risk management 28 1.1.4 Human resources, environmental and social information Table of reconciliation (Articles L. 225-102- 1 and R. 225- 105- 1 of the French Commercial Code) 33 1.1.5 Events since year- end 34 1.1.6 Summary statement of transactions referred to in Article L. 621- 18- 2 of the French Monetary and Financial Code carried out in 2017 34

1.2 CONSOLIDATED FINANCIAL STATEMENTS 35

1.2.1 Consolidated profit and loss account 35 1.2.2 Consolidated statement of comprehensive income 36 1.2.3 Consolidated statement of changes in equity 37 1.2.4 Consolidated balance sheet 38 1.2.5 Consolidated statement of cash flows 40 1.2.6 Notes to the consolidated financial statements 41 1.2.7 Statutory auditors’ report on the consolidated financial statements 80

1.3 PARENT COMPANY MANAGEMENT REPORT AND FINANCIAL STATEMENTS 84

1.3.1 Management report on the parent company financial statements 84 1.3.2 Thales parent company financial statements for the year ended 31 December 2016 88 1.3.3 Statutory auditors’ report on the financial statements 116

2017 Registration Document — THALES 7 2017 Financial Information — Management report

1.1 2017 MANAGEMENT REPORT

1.1.1 Report on operations and results

1.1.1.1 Key figures (adjusted)

(in € millions, except earnings per share and dividend in €) 2017 2016 Total change Organic change

Order intake 14,920 16,514 –10% –9% Order book at end of period 31,914 33,530 –5% –3% Sales 15,795 14,885 +6.1% +7.2% EBIT (a) 1,543 1,354 +14% +16% In % of sales 9.8% 9.1% +0.7 pt +0.8 pt Adjusted net income, Group share (a) 982 897 +9% Consolidated net income, Group share 822 946 –13% Adjusted net income, Group share, per share (b) 4.64 4.25 +9% Dividend per share (b) 1.75 1.60 +9% Free operating cash flow (b) 1,365 954 +43% Net cash at end of period 2,971 2,366 +26%

(a) Non- GAAP measures, see definitions in the appendices, pages 8 and 9. (b) Proposed to the Shareholders’ Meeting on 23 May 2018.

New orders in 2017 amounted to €14,920 million, down 10% compared compared to €472 million in 2016) and from a combination of to the high level recorded in 2016, which was boosted by the items that improved the change in working capital requirement. Q3 2016 booking of the 36 Rafale fighter aircraft contract ordered by At 31 December 2017, net cash was €2,971 million, up more than the Indian government. The Group has therefore exceeded the €600 million compared to 31 December 2016. €14 billion order intake target set at the start of 2017. The strong order momentum in Transport and Defence & Security enabled the Group to offset the slowdown of orders in Space. At 31 December 2017, the 1.1.1.2 Presentation of financial Group’s order book stood at €31,914 million, which represents almost information 2 years’ worth of sales. Sales came in at €15,795 million, up 6.1% on a reported basis, and Accounting policies up 7.2% at constant scope and currency (“organic” change). Sales benefitted from both a high rate of growth in emerging markets (1) The Thales group’s consolidated financial statements are prepared in organic growth of +10.3%, running at more than 10% for the fourth accordance with IFRS (International Financial Reporting Standards) as consecutive year) and a marked upturn in organic growth in mature approved by the European Union at 31 December 2017. markets (1) (+5.8%, after +3.9% in 2016 and +0.5% in 2015). These principles, described in Note 13, are consistent with those In 2017, consolidated EBIT was €1,543 million (9.8% of sales) compared applied for the year ended 31 December 2016. In particular, the new to €1,354 million (9.1% of sales) in 2016, up 14%. All operating mandatory standards applicable as from 1 January 2017 (amendments segments contributed to this increase and improved their EBIT margin. to IAS 12 – Income Tax and annual improvements 2013- 2016), have no impact on the Group’s financial statements. As such, the Group noticeably exceeded all the financial objectives it had set for 2017: an order intake of around €14 billion, a mid-single Non- GAAP financial indicators digit organic sales growth, and an EBIT of between €1,480 million and €1,500 million, up 9% to 11% on 2016, based on February 2017 In order to facilitate monitoring and benchmarking of its financial and scope and exchange rates. operating performance, the Group presents three key non-GAAP indicators, which exclude non- operating and /or non- recurring items. At €982 million, adjusted net income, Group share rose 9%. Its increase They are determined as follows: was held back by one-off items relating to tax reforms in France and the United States. • EBIT, an adjusted operating indicator, corresponds to income from operations plus the share in the net income of equity-accounted Consolidated net income, Group share was €822 million. It posted a companies, before the impact of entries relating to the amortisation fall of 13%, affected by the sharp fall in capital gains on disposal of of intangible assets acquired (purchase price allocation – PPA) assets. recorded as part of business combinations. From 1 January 2016, At €1,365 million compared to €954 million in 2016, free operating it also excludes the other expenses recorded in income from cash flow reached a record level, benefiting from the rise in adjusted operations that are directly related to business combinations, which net income, from a slight reduction in operating investments (€431 million are unusual by nature.

(1) “Mature markets” include Europe, North America, Australia and New Zealand; “emerging markets” include all other countries.

8 THALES — 2017 Registration Document Management report — 2017 Financial Information

This definition drives the definition of other operating indicator on the • free operating cash flow corresponds to the net cash flow from adjusted P&L: operating activities before contributions to reduce the pension deficit – adjusted gross margin corresponds to the difference between in the United Kingdom, and after deducting net operating investments. sales and the cost of sales, less expenses recorded in cost of Readers are reminded that only the consolidated financial statements at sales that are directly related to business combinations, which are 31 December were audited by the statutory auditors, including the unusual by nature, calculation of EBIT, which is described in Note 2 “Segment Information” – adjusted indirect costs correspond to the indirect costs on the to the consolidated financial statements, and free operating cash flow, consolidated profit and loss account (research and development which is described and computed in Note 6.4. Adjusted financial expenses, marketing and selling expenses, general and administrative information other than that provided in the notes to the consolidated expenses), less expenses recorded as part of these expenses and financial statements is subject to the verification procedures applicable that are directly related to business combinations, which are unusual to all information included in this press release. by nature; In this management report, amounts expressed in millions of euros are adjusted net income corresponds to net income, excluding the • rounded to the nearest million. As a result, the sums of the rounded 1 following items and net of the corresponding tax effects: amounts may differ very slightly from the reported totals. All ratios and – amortisation of acquired intangible assets (PPA) recorded as part changes are calculated based on underlying amounts, which feature in of business combinations, the consolidated financial statements. – expenses recognised in income from operations, that are directly related to business combinations, which are unusual by nature, “Organic change” measures the movement in monetary indicators – gains and losses on disposals of assets, changes in scope of excluding the effects of changes in exchange rates and scope of consolidation and other, consolidation. It is defined as the difference between (i) the indicator for – changes in the fair value of derivative foreign exchange instruments the prior period, recomputed at the exchange rates applicable for the (recognised under “Other financial income and expenses” in the current period to entities whose reporting currency is not the euro, less consolidated financial statements), the contribution of entities divested during the current period, and (ii) the – actuarial gains (losses) on long-term benefits (recognised under value of the indicator for the current period less the contribution of “Finance costs on pensions and other long- term employee entities acquired during the current period. benefits” in the consolidated financial statements); The impact of these adjustment entries on the income statements at 31 December 2017 and 31 December 2016 is shown in the tables on pages 4 and 5. Calculation of free operating cash flow is outlined on page 6.

2017 Registration Document — THALES 9 2017 Financial Information — Management report

• CALCULATION OF EBIT AND ADJUSTED NET INCOME – 2017

Adjustments

(in € millions) 2017 Amortisation Gains Change in Actuarial 2017 consolidated of intangible (losses) fair value differences adjusted profit and assets (PPA), on disposals of foreign on long- term P&L loss account related and other exchange employee charges (a) derivatives benefits

Sales 15,795 15,795 Cost of sales (11,951) 1 (11,951) Research and development expenses (802) 5 (797) Marketing and selling expenses (1,041) 5 (1,036) General and administrative expenses (550) 7 (542) Restructuring costs (81) (81) Amortisation of acquisition- related intangible assets (PPA) (113) 113 0 Income from operations 1,258 N / A Impairment of non- current assets (b) 0 0 Disposal of assets, changes in scope and other (82) 82 0 Share in net income of equity affiliates 135 19 154 EBIT N/ A 1,543 Impairment of non- current assets (b) 0 0 Cost of net debt 5 5 Other financial income and expenses (99) 70 (29) Finance costs on pensions and other long- term employee benefits (66) 3 (63) Income tax (264) (85) (29) (24) (1) (403) Net income 887 65 53 46 2 1,052 Non- controlling interests (65) (5) (1) (71) NET INCOME, GROUP SHARE 822 60 53 46 2 982 Average number of shares (thousands) 211,661 211,661 NET INCOME, GROUP SHARE, PER SHARE (in €) 3.88 4.64

(a) Including expenses related to acquisitions recorded in income from operations. See definitions of EBIT and adjusted net income on pages 8 and 9. (b) Included in “Share in net income of equity- accounted companies” in the consolidated income statement and in “Net income” in the adjusted income statement.

10 THALES — 2017 Registration Document Management report — 2017 Financial Information

• CALCULATION OF EBIT AND ADJUSTED NET INCOME – 2016

Adjustments

(in € millions) 2016 Amortisation Gains Change in Actuarial 2016 consolidated of intangible (losses) fair value differences adjusted profit and assets (PPA), on disposals of foreign on long- term P&L loss account related and other exchange employee charges (a) derivatives benefits

Sales 14,885 14,885 Cost of sales (11,277) 1 (11,276) Research and development expenses (736) 6 (731) Marketing and selling expenses (1,023) 6 (1,017) 1 General and administrative expenses (544) 7 (537) Restructuring costs (101) (101) Amortisation of acquisition- related intangible assets (PPA) (107) 107 0 Income from operations 1,097 N / A Impairment of non- current assets (b) 0 0 Disposal of assets, changes in scope and other 205 (205) 0 Share in net income of equity affiliates 120 11 131 EBIT N/ A 1,354 Impairment of non- current assets (b) 0 0 Cost of net debt 6 6 Other financial income and expenses (81) 70 (10) Finance costs on pensions and other long- term employee benefits (78) 12 (66) Income tax (256) (58) 28 (24) (4) (314) Net income 1,015 79 (177) 46 8 970 Non- controlling interests (68) (4) (1) (74) NET INCOME, GROUP SHARE 946 75 (177) 45 8 897

Average number of shares (thousands) 210,872 210,872 NET INCOME, GROUP SHARE, PER SHARE (in €) 4.49 4.25

(a) Including expenses related to acquisitions recorded in income from operations. See definitions of EBIT and adjusted net income on pages 8 and 9. (b) Included in “Share in net income of equity- accounted companies” in the consolidated income statement and in “Net income” in the adjusted income statement.

(1) Compte tenu d’un effet change négatif de 316 M€ et d’un effet de périmètre net positif de 81 M€, principalement lié à la consolidation de la société Vormetric à compter de mars 2017 (secteur Défense & Sécurité).

2017 Registration Document — THALES 11 2017 Financial Information — Management report

• CALCULATION OF FREE OPERATING CASH FLOW

(in € millions) 2017 2016 Change

Operating cash flow before interest and tax 1,776 1,698 +78 Change in working capital and reserves for contingencies 223 (63) +286 Pension expense, excluding contributions related to the reduction of the UK pension deficit (121) (102) –19 Net interest (paid) / received 8 (8) +16 Income tax paid (91) (99) +9 Net cash flow from operating activities, excluding contributions related to the reduction of the UK pension deficit 1,796 1,426 +369 Net operating investments (431) (472) +41 FREE OPERATING CASH FLOW 1,365 954 +411 Net (acquisitions) / disposals (80) (94) +15 Contributions related to the reduction of the UK pension deficit (82) (88) +6 Dividends paid (349) (297) –52 Changes in exchange rates and other (248) (87) –162 CHANGE IN NET CASH 606 388 +218

1.1.1.3 Order intake

2017 order intake amounted to €14,920 million, down 10% on 2016 (- 9% at constant scope and currency (1)). The book- to- bill ratio was 0.94 for the year, compared to 1.11 in 2016 and 1.34 in 2015, both years marked by an exceptional intake of large contracts, notably with the booking of 6 major orders (2).

(in € millions) 2017 2016 Total change Organic change

Aerospace 5,200 5,872 –11% –11% Transport 1,780 1,504 +18% +20% Defence & Security 7,883 9,063 –13% –12% Total – operating segments 14,863 16,439 –10% –9% Other 57 75 TOTAL 14,920 16,514 –10% –9% Of which mature markets(a) 10,824 10,138 +7% +7% Of which emerging markets (a) 4,095 6,376 –36% –35%

(a) Mature markets: Europe, North America, Australia, New Zealand. Emerging markets: all other countries.

The consolidated order book remained at a high level: €31.91 billion – the operation and maintenance of critical security, information at 31 December 2017, an increase of €7.4 billion (30%) since the and communication systems at the French Ministry of Defence’s launch of Ambition 10 (€24.47 billion at 31 December 2013). new headquarters, – a contract in the framework of the development and construction Thales received 19 large orders with a unit value of over €100 million, of five intermediate- sized frigates (FTIs) for the French Navy, representing a total amount of €2,915 million: – Thales’s stake in the manufacturing of the first armoured vehicles • one contract booked in Q1 2017, for the provision of a telecommunications for the Scorpion programme, for the French Ministry of Defence, satellite to the Russian operator Gazprom Space System; – the supply of AREOS reconnaissance pods to a military customer, – the delivery of several systems and sensors to an emerging- market seven large orders booked in Q2 2017: • Navy; – the supply of in-flight entertainment (IFE) systems to a major carrier, – the construction for Inmarsat of a very high throughput satellite (V-HTS),

(1) Taking into account a negative exchange rate effect of €142 million and a net positive scope effect of €5 million, mainly linked to the consolidation of RUAG’s opto-electronic business as at 1 January 2017 (Aerospace segment), Vormetric as at 16 March 2016 and Guavus as at 12 September 2017 (Defence & Security segment), off- set by the disposal of the identity management business, effective as at 9 May 2017 (Defence & Security segment). (2) With a unit value of more than €500 million.

12 THALES — 2017 Registration Document Management report — 2017 Financial Information

• three large orders booked in Q3 2017: Orders with a unit value of less than €100 million grew by 1% compared – an additional contract in the framework of the development and to 2016. construction of the intermediate-sized frigates (FTIs) for the French From a geographical point of view, order intake was logically down in Navy, emerging markets (€4,095 million, - 36%), Asia having benefited in – the notification of an additional contract in the framework of the 2016 from the order related to Indian Rafale fighter aircraft and the CONTACT tactical digital communications programme for the French Middle East, of 2 large orders (1). Order intake in mature markets Ministry of Defence, recorded growth (€10,824 million, +7%), driven especially by France – The sale of an integrated air defence system to an Asian country; (+28%) and the United Kingdom (+15%). eight large orders booked in Q4 2017: • At €5,200 million compared to €5,872 million in 2016, order intake – a new tranche of the construction programme for 6 meteorological in the Aerospace segment was down 11%. Avionics, both civil and observation satellites “Meteosat Third Generation”, for ESA and military, was particularly robust. In- flight entertainment (IFE) maintained a EUMETSAT, solid commercial performance, in both the fields of traditional multimedia – the modernisation of the signalling and telecommunication systems and in connectivity. Space order intake was however significantly 1 systems for one of the main railways in Egypt, down, affected by the wait- and- see attitude of telecommunications – the extension of a signalling project for one of the world’s largest satellite operators and by a high basis of comparison in the institutional undergrounds, area (observation, exploration, navigation). – a further contract related to the 36 Rafale fighter aircraft ordered by the Indian government, Order intake in the Transport segment totalled €1,780 million, up – an operational support contract for the European air defence 18% on 2016, driven by robust growth in both urban and mainline signalling. systems on behalf of OCCAR, to be delivered through the Eurosam At €7,883 million, order intake in the Defence & Security segment joint venture, posted a 13% fall which can be explained by India’s 2016 booking – the support of the “Voyager” air- tanker programme for the United for Rafale fighter aircraft. Excluding this “one-off” item, order intake in Kingdom’s air force, this segment was up, benefiting from robust bookings across almost all – the second part of the SSOP sensor support contract for the businesses. United Kingdom’s Royal Navy, – the first tranche of the Aerospace consumables logistics programme for the French armed forces (LORCA programme).

1.1.1.4 Sales

(in € millions) 2017 2016 Total change Organic change

Aerospace 5,985 5,812 +3.0% +3.6% Transport 1,761 1,603 +9.9% +11.2% Defence & Security 7,983 7,390 +8.0% +9.4% Total – operating segments 15,729 14,805 +6.2% +7.3% Other 66 80 TOTAL 15,795 14,885 +6.1% +7.2% Of which mature markets (a) 10,913 10,395 +5.0% +5.8% Of which emerging markets (a) 4,882 4,490 +8.7% +10.3%

(a) Mature markets: Europe, North America, Australia, New Zealand. Emerging markets: all other countries.

Sales for 2017 stood at €15,795 million, compared to €14,885 million Sales in the Aerospace segment came in at €5,985 million, up 3.0% for 2016, up 6.1% on a reported basis, and up 7.2% at constant compared to 2016 (up +3.6% at constant scope and currency). The scope and exchange rates(2) (“organic” change), driven by very good commercial avionics business remained robust, driven in particular by momentum across virtually all segments. the growth in deliveries of avionic systems to Airbus. In-Flight Entertainment was affected by a high basis of comparison and posted a slight drop As expected, sales saw a marked acceleration in the fourth quarter in sales as a result. Space sales experienced strong growth, lifted by (+12.5% on reported basis, +14.8% in organic terms), driven by a weak the ramp-up of contracts signed in 2014 and 2015 in both observation basis of comparison and by phasing effects between Q3 and Q4 2017. and telecommunications activities. Sales in other segment businesses From a geographical perspective, this good performance reflects both fell, as the growth in the training and simulation business was insufficient continued strong growth in emerging markets, running at more than 10% to offset the declining sales of microwave tubes, affected by the slowdown for the fourth consecutive year (+10.3%), and increased organic growth of the global satellite market. in mature markets (+5.8%, after +3.9% in 2016 and +0.5% in 2015). Emerging markets accounted for 31% of Group sales, up from 30% in 2016 and 23% in 2013, the year prior to the launch of Ambition 10.

(1) In- flight entertainment systems for Emirates’ future Boeing 777X as well as the signalling systems for the Dubai metro extension. (2) Taking into account a negative exchange rate effect of €145 million and a net positive scope effect of €2 million, mainly linked to the consolidation of RUAG’s opto-electronic business as at 1 January 2017 (Aerospace segment), Vormetric as at 16 March 2016 and Guavus as at 12 September 2017 (Defence & Security segment), off-set by the disposal of the identity management business, effective as at 9 May 2017 (Defence & Security segment).

2017 Registration Document — THALES 13 2017 Financial Information — Management report

In the Transport segment, sales totalled €1,761 million, up 9.9% the ramping- up of the Hawkei vehicle supply contract for the Australian compared to 2016 (up +11.2% at constant scope and currency). This Defence Force. The Defence Mission Systems business posted strong growth reflected the progress on the major urban signalling projects growth for combat aircraft systems, driven by the 3 major Rafale contracts won in 2015 and 2016 (Doha, Dubai, Hong Kong, London). The in Egypt, Qatar and India. Despite favourable dynamics in cybersecurity strong rise in sales in the fourth quarter is not representative of the trend and military network and infrastructure systems, the Secure Information in this business activity; it reflects a low basis of comparison and phasing Systems and Communication business posted a more modest growth, effects between quarters. especially as several major critical infrastructure protection contracts came to an end. Sales in the Defence & Security segment were €7,983 million, up 8.0% compared to 2016 (up +9.4% at constant scope and currency). As expected, sales in the Defence & Security segment recorded strong Almost all businesses contributed to this momentum. The Land and Air growth in the fourth quarter (+19.4% based on reported figures, Systems business recorded particularly acute growth in optronics, +22.1% on an organic basis), owing to contract phasing effects and a missile electronics, Air Traffic Management and protected vehicles, with favourable prior- year basis of comparison.

1.1.1.5 Adjusted results

EBIT In 2017, consolidated EBIT (1) was €1,543 million, or 9.8% of sales, compared to €1,354 million (9.1% of revenues) for the same period in 2016. EBIT advanced by 14% based on reported figures, and by 16% on an organic basis. Compared to 2013, the year before the launch of Ambition 10, it is up 53% (+50% on an organic basis).

(in € millions) 2017 2016 Total change Organic change

Aerospace 601 571 +5% +7% In % of sales 10.0% 9.8% +0.2 pt +0.3 pt Transport 72 11 x6.3 x6.3 In % of sales 4.1% 0.7% +3.4 pt +3.3 pt Defence & Security 869 787 +10% +13% In % of sales 10.9% 10.7% +0.2 pt +0.3 pt Total – operating segments 1,542 1,370 +13% +15% In % of sales 9.8% 9.3% +0.5 pt +0.6 pt Other – excluding Naval Group (47) (49) Total – excluding Naval Group 1,495 1,321 +13% +15% In % of sales 9.5% 8.9% +0.6 pt +0.7 pt Naval Group (35% share) 48 34 TOTAL 1,543 1,354 +14% +16% In % of sales 9.8% 9.1% +0.7 pt +0.8 pt

The Aerospace segment posted EBIT of €601 million (10.0% of Naval Group’s contribution to EBIT totalled €48 million in 2017, sales), versus €571 million (9.8% of sales) in 2016. The EBIT margin compared to €34 million in 2016, buoyed by the improved operating rose in particular in the Space and cockpit avionics businesses, even as profitability in naval defence (which nevertheless included a few the Group implemented a sharp upturn in R&D investments. Profitability one-time items), partially offset by the depreciation of some assets in remained however under pressure within the microwave and imaging renewable marine energies.. systems activities, affected by the slowdown in the global satellite Naval Group’s contribution to EBIT totalled €48 million in 2017, construction market. compared to €34 million in 2016, the improved operating profitability EBIT for the Transport segment continued to grow sharply, at €72 million being partially offset by the depreciation of some assets in renewable (4.1% of sales), compared to €11 million (0.7% of sales) in 2016. This marine energies. improvement is fully in line with the recovery plan that has been implemented since mid- 2015, but low or zero margin contracts continued Adjusted financial result to weigh down on profitability. Ongoing transformation efforts and the At €5 million in 2017 compared to €6 million in 2016, the amount of gradual phasing-out of low-margin contracts should help this business net financial interest remained low. Other adjusted financial results regain its past profitability levels by 2018 / 2019. (expense) amounted to a net expense of - €29 million, compared to EBIT for the Defence & Security segment was €869 million (10.9% of a net expense of - €10 million in 2016, primarily due to a less favourable sales), compared to €787 million (10.7% of sales) in 2016. Just as in foreign exchange performance. Adjusted finance costs on pensions 2016, the EBIT margin for this segment improved organically by 0.3 and other employee benefits remained stable (- €63 million, versus points, driven by sales growth, good cost control and a drop in - €66 million in 2016), with the rise in pension obligations between restructuring costs. 1 January 2016 and 1 January 2017 offset by a decline in discount rates.

(1) Non- GAAP measures, see definitions on pages 8 and 9.

14 THALES — 2017 Registration Document Management report — 2017 Financial Information

Adjusted tax expense The net balance of acquisitions and disposals amounted to -€80 million. It primarily included the net cash outflow of €91 million incurred when Adjusted tax expense amounted to a net of - €403 million in 2017 finalising the acquisition of Guavus, one of the pioneers in real-time compared to -€314 million in 2016, representing 31.0% of adjusted “big data” analytics, and the proceeds from the disposal of the identity net income before tax and Thales’s share in the net income of equity management business finalised in May 2017. affiliates. This rise in the effective tax rate can be explained by 3 one-off non- cash items representing a negative amount of €66 million: At 31 December 2017, net cash totalled €2,971 million compared to €2,366 million at 31 December 2016, after the distribution of €349 million the benefit from the cancellation by France of the 3% tax payable • in dividends (€297 million in 2016). on dividends, which was offset in 2017 by the one-off tax contribution implemented by the government; At €5,326 million versus €4,640 million at 31 December 2016, equity, Group share was up, driven by the consolidated net income, Group the estimated impact of the French parliament approving a gradual • share, a fall in net pension provisions, and a higher valuation of the currency reduction of corporate income tax, which will drop from 34.43% in derivatives portfolio. 2018 to 25.83% in 2022; and 1 • the estimated impact of the drop in the United States federal tax rate, which moves from 35% to 21% as of 1 January 2018, following 1.1.1.8 Proposed dividend the approval of the “Tax Cuts and Jobs Act”. At the Annual General Meeting on 23 May 2018, the Board of Directors Excluding these 3 one- off items, the effective tax rate would have been will propose the distribution of a dividend of €1.75 per share, an 26%, the same rate as in 2016. increase of 9% on 2016. Adjusted net income If approved, the ex- dividend date will be 30 May 2018 and the payment date will be 1 June 2018. The dividend will be paid fully in Adjusted net income, Group share (1) totalled €982 million, compared cash and will amount to € 1.30 per share, after deducting the interim to €897 million in 2016, up 9%. dividend of € 0.45 per share paid in December 2017. Adjusted net income, Group share, per share (1) came out at €4.64, also up 9% on 2016 (€4.25). Without the 3 one-off tax items mentioned above, the adjusted net income, Group share, would have come out at 1.1.1.9 IFRS 15 implementation €4.96, up 14% compared to 2016. In 2017, the Group continued to work on the implementation of the IFRS 15 standard “Revenue from contracts with customers”. This standard, 1.1.1.6 Consolidated results the application of which has been mandatory since 1 January 2018, provides for: Income from operations • new criteria to demonstrate the continuous transfer of control of goods to the customer and enable the recognition of revenue over time; Income from operations amounted to €1,258 million versus €1,097 million in 2016, up around 15%. This increase reflects the • the unbundling of multiple performance obligations within a single improvement in gross margin and great discipline over indirect costs, contract; which were up just 4%. General and administrative expenses increased measurement of progress towards completion of a contract (or by 1% from 2016 to 2017 • performance obligation for unbundled contracts) based on costs incurred. Income from operations after share in net income of equity- accounted companies With regard to sales and adjusted gross margin, the differences are primarily due to the change in the percentage-of- completion method for Income from operations after share in net income of equity- accounted long- term contracts. Currently, contract sales and margins are recognised companies amounted to €1,311 million versus €1,422 million in as and when technical milestones are reached, which attest to the 2016, down 8%, affected by changes to the “disposal of assets, effective stage of completion of a portion of the work or the performance changes in scope of consolidation and other” line, which had benefited of services provided for in the contract. Under IFRS 15, the percentage- in 2016 from capital gains on the disposal of shareholdings, in of-completion method used is the cost-to- cost method, whereby revenue Hanwha Thales and Thales-Raytheon Systems LLC. Share in net income is recognised based on costs incurred at a given date divided by total of equity affiliates amounted to €135 million, up 12%. costs expected at completion. For each contract, depending on the stage of completion and the type of milestones reached and costs incurred Net income during the period, this change of method may lead to the recognition of Consolidated net income, Group share, came out at €822 million revenue and margins being deferred from one period to another. versus €946 million, down 13%. To a lesser degree, these differences are due to certain contracts being unbundled into performance obligations with differentiated margins (particularly for contracts combining construction and operation, or the 1.1.1.7 Financial position at construction and launch of a satellite), which may also lead to the 31 December 2017 deferral of the recognition of revenue and margins. Finally, the impact of the requalification of contracts no longer fulfilling At €1,365 million versus €954 million in 2016, free operating cash over time recognition criteria is very limited. A detailed analysis of the flow (1) reached a record level, benefiting from the rise in adjusted net contract portfolio found that this requalification, which could have income, from a good control of operating investments (€431 million generated very significant deferrals in the recognition of revenue and compared to €472 million in 2016) and from a combination of items margins if it had applied to a large number of contracts, only concerns that improved the change in working capital requirement The cash a small number, the total revenue of which represents less than 1% of the conversion rate from adjusted net income into free operating cash flow order book at 31 December 2016. reached 139%.

(1) Non- GAAP measures, see definitions pages 8 and 9.

2017 Registration Document — THALES 15 2017 Financial Information — Management report

Had this standard been applicable as of 1st January 2017, these As a result, restated 2017 EBIT would have been €1,365 million, impacts taken together would have led to a negative restatement of €177 million lower than the EBIT reported for the same period. The fall €568 million on 2017 sales, and of €133 million on 2017 adjusted in EBIT margin (9.0% under IFRS 15 versus 9.8% under current gross margin, which would in turn amount to 24.4% of sales (+0.0 standards) corresponds primarily to the negative operating leverage points). As the new standard affects neither the total revenue nor the due to lower sales, with the gross margin remaining stable in overall profitability of each contract, this restatement corresponds solely percentage, and indirect costs virtually unchanged by the standard. to timing differences. These amounts reflect the impact on the aggregate sales and margin of The impact of the standard on 2017 adjusted indirect costs would have several thousand contracts; they are not representative of the standard’s amounted to –€29 million, corresponding solely to the derecognition impact on the financial statements of future periods. of bid costs from costs at completion and their subsequent recognition After restatement, the adjusted net income, Group share would have under indirect costs for the period. amounted to €840 million, €142 million lower than the reported The impact on the 2017 share in net income of equity affiliates would amount, reflecting the shifts in the timing of sales recognition resulting have been negative by €15 million, exclusively linked to Naval Group. from the new standard. The application of the standard would have had a similar negative impact, €142 million, on the consolidated net income, Group share.

• RESTATED KEY 2017 FIGURES

2017 Restated Reported Difference for IFRS 15 (in € millions, except earnings per share (in €)) €m %

Order intake 14,931 14,920 +12 +0% Order book at end of period 32,064 31,914 +150 +0% Sales 15,228 15,795 (568) –4% Adjusted gross margin (a) 3,711 3,845 (133) –3% In % of sales 24.4% 24.3% +0.0 pt Adjusted indirect costs (a) (2,404) (2,375) (29) +1% Restructuring costs (81) (81) – +0% Share in net income of equity affiliates 139 154 (15) –10% EBIT (a) 1,365 1,543 (177) –11% In % of sales 9.0% 9.8% –0.8 pt Adjusted net income, Group share (a) 840 982 (142) –14% Adjusted net income, Group share, per share (a) 3.97 4.64 (0.67) –14% Consolidated net income, Group share 680 822 (142) –17% Free operating cash flow (a) 1,365 1,365 0 +0%

(a) Non-GAAP measures, see definitions on pages 8 and 9.

• RESTATED 2017 SALES AND EBIT BY OPERATING SEGMENT

2017 Restated for IFRS 15 Reported Difference

(in € millions) Sales EBIT EBIT Sales EBIT EBIT Sales EBIT EBIT margin margin margin

Aerospace 5,747 567 9.9% 5,985 602 10.0% –4% –6% –0.1 pt Transport 1,723 57 3.3% 1,761 72 4.1% –2% –21% –0.8 pt Defence & Security 7,690 757 9.8% 7,983 869 10.9% –4% –13% –1.1 pt Total – operating segments 15,160 1,380 9.1% 15,729 1,542 9.8% –4% –10% –0.7 pt Other 67 –15 66 1 – TOTAL 15,228 1,365 9.0% 15,795 1,543 9.8% –4% –11% –0.8 PT

16 THALES — 2017 Registration Document Management report — 2017 Financial Information

1.1.1.10 Update on the projected the defence businesses should offset the slowdown of the telecom Gemalto acquisition satellite market. In this context, 2018 order intake is expected to be around €15.5 billion. On 17 December 2017, Thales and Gemalto (Euronext Amsterdam In spite of a more moderate growth in the Aerospace segment, sales and Paris: GTO) announced the signing of a merger agreement should see an organic growth of between 4 and 5% compared to including an all- cash offer for all issued and outstanding ordinary 2017 sales restated for the application of the IFRS 15 standard shares of Gemalto, for a price of €51 per share cum dividend (1). This (€15,228 million). offer was unanimously recommended by Gemalto’s Board of Directors. The Group will continue to significantly increase its R&D investments, Preparations for this offer are proceeding as planned. The draft offer particularly in digital technologies. The self-funded R&D expenses document is under review by the Dutch Financial Markets Authority should therefore increase by around 10% compared to 2017. (AFM). The process of obtaining the necessary regulatory authorisations The growth in sales, combined with the impact of the Ambition 10 is also underway. The transaction is expected to close shortly after all of strategy on product competitiveness and differentiation, should result in the usual regulatory approvals have been secured, which is expected in 1 Thales delivering an EBIT of between €1,620 and €1,660 million in the second half of 2018. 2018 (based on February 2018 scope and exchange rates), representing All charges directly related to this transaction will be excluded from the an increase of 19% to 22% compared to 2017 EBIT restated for the 2018 EBIT and adjusted net income. application of the IFRS 15 standard (€1,365 million). Therefore, the Group expects to exceed its two mid-term objectives: the average organic sales growth in the 2016- 2018 period should be over 1.1.1.11 2018 Outlook 5%, and the 2018 EBIT margin should be above the top end of the range set in April 2014 (9.5% to 10% in 2017 / 2018). As of 1 January 2018, the Group applies the IFRS 15 standard This outlook does not take into account the projected acquisition of “Revenue from contracts with customers”. To provide a basis for Gemalto. The Group may need to update its outlook depending on the understanding the 2018 financial targets, the 2017 results restated effective conclusion date of this transaction. for the application of this standard are presented on page 16. The Group will provide a detailed update on its strategy and set In 2018, Thales should continue to benefit from positive trends in the medium-term financial targets at a Capital Markets Day to be held on majority of its markets. The acceleration of the commercial momentum in 6th June 2018, at its Gennevilliers site, in the Paris area.

1.1.2 Risk factors

Thales is exposed to numerous risks and uncertainties which could The actual cost of development and manufacture may therefore exceed materially affect its business, reputation, financial position, results or initial cost estimates, which in turn may adversely impact Thales’s results ability to achieve its objectives. The risks described below are not the and financial position, especially considering that the associated only ones that Thales faces. Other risks, currently unknown to Thales, or contracts are generally based on a fixed, all- inclusive price. In addition, which presently appear to be non- significant, could also have an many contracts include stringent performance levels and/ or tight delivery unfavourable impact on the business, profitability and financial position schedules for the products or systems sold, particularly given the strong of the Group or its ability to achieve its objectives. competition. If Thales is unable to deliver these products or systems in line with the required level of performance and/ or delivery schedule, Generally, Thales may be faced with a number of operational and customers may demand penalty payments or even decide to terminate strategic risks (Section 1.1.2.1), legal and compliance risks (Section the contract. 1.1.2.2) and financial risks (Section 1.1.2.3). Bid and project management is therefore subject to a detailed risk See also Section 1.1.3 “Internal control and risk management”. assessment and management process. Thales ranks the various levels of criticality. Critical bids and projects are specifically monitored at the management level of the operating entities (Business Lines and Global 1.1.2.1 Operational and Business Units) and, as needed, by Group management. strategic risks Contractual risk assessment is an integral part of the tendering process. Depending on the complexity of the bid, this procedure involves a 1.1.2.1.1 Control of bids and projects number of steps which progressively sharpen the estimated level of profitability and the associated risks to be assessed. Many of Thales’s products and systems are highly complex due to their Numerous Thales contracts, particularly those that involve the most advanced technology content, the rigorous operational constraints and complex products and services, run for several years. Their economic harsh environments in which they operate (which require them to be contribution to the Group’s result over a given period is therefore extremely reliable), and the contractual arrangements surrounding their assessed, in accordance with applicable accounting standards, based sale (comprehensive prime contractorships for large- scale systems, on an estimate of their cost to completion. public-private partnerships or their equivalent, local shares, compensation commitments (see Section 1.1.2.1.10), etc.). These assessments can result in uncertainties that require subsequent correction despite the careful attention that is paid to estimates for each project through regular reviews to measure the technical, contractual and financial progress made.

(1) Valuing the equity capital of Gemalto at approximately €4.8 billion.

2017 Registration Document — THALES 17 2017 Financial Information — Management report

The Group pays special attention to analyses and action plans for the disappearance of a company or its takeover by investors with efficiently managing bids and projects by measuring and monitoring different interests from those of Thales. financial variance on the projects as well as appropriately applying Faced with this risk of a supply shortage, Thales implements a dual corrective actions. sourcing (or alternative- source) policy as frequently as possible for each As part of the Ambition Boost performance programme (see also technology family, regularly updated and accompanied by buffer Section 1.1.2.1.8 “Risk of lower impact of performance improvement inventories that cover its requirements until customer contracts have been measures”), the Group has also implemented action plans to improve fulfilled. the management of bids and projects, engineering and the supply chain. In addition, given the increased risk of fragility of certain suppliers in the These actions aim in particular to: current economic climate, Thales has introduced a special approach. • improve product policy and ensure it is better adapted to customer Based on close cooperation between buyers and financial teams, this is needs in order to streamline new developments and thus reduce risks; aimed at identifying, from among its critical suppliers, those that would be particularly susceptible financially and implementing appropriate improve the management of commitments in both the bidding phase • action plans to ensure continuity of supply. Apart from individual and the project phase, with the widespread use of independent monitoring, an analysis is also carried out by technology field in peer reviews, closer involvement of Engineering, Purchasing, conjunction with the professional bodies concerned, to identify the most Production, Legal and Quality Control, and the introduction of appropriate solutions. Product and Project Design Authorities responsible for developing the technical solutions for products and projects (during the bid or Alongside these financial supervision measures, Purchasing and Quality project implementation phase); Control have stepped up their appraisal, accreditation and management of supplier performance to better identify structural risks. Improve the supply chain, by increasing its global dimension and • Supplier performance audits are broad-based (covering quality control, enhance the increasing maturity of emerging countries in project industrial maturity, flow optimisation, compliance with environmental implementation; regulations, expertise in technical and technological processes, • improve methods, practices and tools to make them more relevant to financial strength, etc.) and therefore allow a complete risk analysis to international products/ projects, in particular, through the implementation be carried out. When performing a purchasing contract, Thales closely of a project management tool adapted to emerging countries, SAP monitors the implementation by the supplier of measures aimed at by Design; addressing the risks identified during the selection process. • introduce advanced training for project managers to obtain Risk of economic dependence certification issued jointly with the International Project Management The economic dependence of small and medium- sized enterprises Association (IPMA). At the end of 2017, nearly 1,353 bid and (SMEs) towards Thales is considered a risk in its own right. project managers and project management officers (PMO) within the Group had gained IPMA certification, with approximately In order to mitigate this risk, the commitment rate (orders placed by 187 certified during the year. The role of these project managers will Thales as a percentage of the supplier’s annual sales) is measured for be further increased within the PMO organizations and teams. each panel of suppliers by market segment (vertical approach) and for the main countries where the Group is established (France, the UK, the Netherlands, etc.). 1.1.2.1.2 Supplier risk If the commitment rate exceeds 50% for more than two consecutive Purchases constitute a very significant proportion of Thales’s business, years, an action plan coordinated with internal specifiers and internal representing nearly half its sales with purchases ranging from industrials users is created in order to return to a commitment rate of 25%. to services, equipment and sub- systems. Thales is therefore exposed to The purchasing policy, supplier selection and performance monitoring the risk of the industrial, technical or financial default of any of its processes, and the supplier monitoring systems are designed to reduce suppliers, which could affect tits performance and, hence, profitability. these risks, during both the bidding phase and the project There are two major types of supplier risk: implementation phase. • legal or regulatory non-compliance (ethics, export control, intellectual property, etc.); each of these risks is handled by the 1.1.2.1.3 Human resources risk departments concerned using the Group Risk Management system with the support of the Purchasing department; a) Workplace health and safety structural and operational risks that could disrupt supply, which are • One of the Group’s key priorities is to provide a safe and healthy work dealt with in the Purchasing department using the Group Risk environment for all employees, in compliance with applicable law, by Management system. The Purchasing department has identified two monitoring procedures, preventing health and occupational risks and key triggers: supplier default and economic dependence. training employees. Risk of supplier default These principles are reflected in a structure designed to prevent risks related Supplier default could be caused by a major incident at one of its sites, to health and safety in the workplace, whether on Thales sites or external by its external environment (shortage of raw materials or components, sites, and to manage major health crises that could occur internationally. major political instability, natural disasters, etc.) or through Regular monitoring of the risks to which the Group’s employees may be mismanagement. The supplier’s management performance is monitored exposed is performed each year. both in operating terms (poor procurement planning, failure to manage tier 2 suppliers, loss of control over industrial processes, plant Tangible measures are also implemented in relation to the prevention of obsolescence, etc.) and in cross- disciplinary and financial terms (poor risks related to the health and safety of employees in the workplace by skills management, loss of know- how, fall in sales, mismanagement of the Group’s Human Resources and Health, Safety and Environment working capital requirement, cash flow problems, administration or Departments. For many years, Thales has also been committed to bankruptcy protection, etc.). A combination of problems could lead to improving the quality of life in the workplace. In France, a third Group

18 THALES — 2017 Registration Document Management report — 2017 Financial Information

agreement on “quality of life in the workplace” is under negotiation to of changes in jobs, expertise, and the needs of the Company, and increase the Group’s commitments and actions relating specifically to creates action plans (for training, anticipated management of internal protecting the health of employees, improving well-being at work, mobility, external recruitment, etc.). To complement this tool, each year preventing psychosocial risk situations and the right to disconnect to the Group’s internal university updates key training programmes in ensure a good work- life balance. response to changing needs. Significant work was carried out from 2014 to 2016 to pinpoint employee soft skills, namely for those Proof of the Group’s continuing commitment to certification, 107 Thales employees reporting to the R&D Systems, R&D Hardware, R&D entities (representing 82% of the workforce) had obtained OHSAS Software, Purchasing and Project Management job families. This work 18001 certification by the end of 2017. helps to more precisely identify training and recruitment requirements. In July 2017, Thales University, renamed Learning Hub, was completely b) Talent development overhauled to adapt its training tools to the digital era and to better If Thales is not attractive enough compared to its competitors to recruit integrate the training into employees’ professional life. the qualified staff it needs in a timely manner and to retain and motivate its Lastly, in 2013, the Group signed a series of agreements with the employees, sales and operating profitability could be negatively affected. 1 unanimous support of the trade union organisations in France that Thales’s success and performance effectively depend on: encourage the integration of young people, either on work- study training schemes or post- qualification, and the transfer of knowledge its capacity to recruit employees in the different employment markets, • (the Intergenerational Agreement); that develop diversity (the Gender in France and abroad; Equality Agreement); and that take a forward- looking approach to jobs • the quality of the key skills and the commitment of its employees; and and skills. In 2017, the number of young people on work- study contracts in Thales’s workforce in France represented close to 5%, in its capacity to globally manage the talent required for the development • line with the agreement signed in 2013. of its activity worldwide. Thales therefore attaches great importance to its attractiveness and 1.1.2.1.4 Environmental risks positioning as a top employer, ensuring a positive external image which will boost recruitment and an internal work environment that will contribute For many years, Thales has conducted a regular analysis and update of to retaining employees. environmental risks in accordance with its business activities, scientific As an attractive and recognised employer in France, Thales is also and technical developments as well as with current regulatory change. building up its image in all the countries where the Group is already This analysis is aimed at: present and in the countries in which Thales plans to expand, notably through communication campaigns and partnerships with leading • regularly ensuring that employees and neighbouring residents are universities. In addition, a global recruitment role, reporting to the not exposed to health and environmental risks (hazardous substances, corporate HR department has been created to help the Group expand pollution, asbestos, etc.) through their activities or work environment, in these geographical zones. whether on Thales or external sites; Thales works constantly to support its employer brand. The Group • ensuring the compliance of activities and products used and/ or recently updated its brochures, booths, posters, web visuals and all marketed (substances, waste, etc.); other communication materials used at the various recruitment events analysing the impact of new regulations (e.g. REACh in Europe) on worldwide and on Thales’s social media pages. The Group currently • the supply chain and on product design; has more than 230,000 followers on LinkedIn. analysing the impact of the environment on activities (water stress, Thales has also developed innovative initiatives to attract rare skills in • climatic events, etc.); fields such as in electronics and cyber-security, by organising challenges for students and young engineers such as cyber-security • identifying an appropriate organisational structure and associated week and the Arduino project, a university competition held in 10 action plans, either at Group level or locally, based on the results of countries. This project gives more than 100 teams of young engineers this analysis to reduce and manage the associated risks. the opportunity to develop innovative projects on subjects defined by To support this analysis, an environmental management system the Group. These events give young engineers from across the world designed to ensure control and limitation of the environmental impacts an insight into the Group and its business activities. of activities and products is implemented on all sites. This management In recent years, Thales has also contributed to the integration of young system, which forms an integral part of the Group’s framework, people into business through the signature of close to 1,500 work-study encompasses the different functions of the Group (engineering, contracts each year. Thales maintains active relations with schools and manufacturing, supply chain, etc.) and is based on frameworks, special universities in all the countries where it intends to increase its presence. training, communication tools and sharing experience. Many partnerships have been signed with these schools, which At the end of 2017, 124 entities had been ISO 14001 certified, employees sometimes visit to provide training. Thales also has a representing 89% of the Group’s workforce, 33 had been ISO 50001 presence on campuses through young employees who are alumni of certified, representing 26% of the Group’s workforce and 107 had these schools, and form a network of contacts. In France, Thales is been OHSAS 18001 certified, representing 82% of the Group’s regularly recognised as one of the top three companies by students of workforce. engineering schools. Thales also regularly assesses the risks linked to climate change in order to The global process of identifying and developing talent within the evaluate their impact on activity and costs. The main risks identified are: Group has also been reinforced by encouraging interaction between management teams in different parts of the organisation. • regulatory change (reporting, carbon taxes, etc.) which has a very limited impact for Thales (not affected by the EU Emissions Trading Thales is also continuing its proactive skills management policy for the Scheme). Nevertheless, Thales closely monitors current and future Group’s main professional families. A Steering Committee per family, laws and regulations in order to analyse and anticipate their impact composed of operational and HR managers, conducts a yearly analysis and set in place the requisite measures;

2017 Registration Document — THALES 19 2017 Financial Information — Management report

• changes in the regulations on substances and products (REACh in Finally, in close collaboration with the other major functions concerned, Europe and elsewhere in the world) in order to anticipate obsolescence the Group Security department is working to improve crisis issues to secure its supplies, reduce and control the impacts on the management processes, put in place rules and define a policy to raise products and services it delivers through the required avoidance awareness on information protection. and replacement measures; but also to control the risks related to the handling of hazardous substances, for both people and the natural 1.1.2.1.6 Risk of IT system failure environment; • financial risks related to the effects of climate change (floods, The Group operates – whether directly or through service providers – hurricanes, fires, water stress, etc.) that can result in damages and a complex IT systems and infrastructures that are essential to the smooth continuous disruption in activity at Thales sites as well as the sites of running of its commercial, industrial and financial processes. These its subcontractors and partners. information systems include management, development and engineering systems as well as platforms operated on behalf of our customers and To manage this risk and reduce its vulnerability, Thales has carried must be protected against any malfunctions, natural disasters, malicious out regular assessments of the exposure of its different sites to natural acts or human error at all costs. The malfunction or failure of these disasters and their consequences for several years now. Action plans systems may have external causes (viruses or hacking, network failures, linked to these assessments have been defined in order to attenuate natural disasters, etc.) or internal causes (malicious acts, breaches of this risk (see Section 5.2.4), and the Group’s insurance policy (see data confidentiality, human error or obsolescence). Any such Section 1.1.2.4 “Insurance”) is also based on these assessments; malfunction or failure can have an impact on the Group’s operations • risks related to water shortages. The majority of Group sites in vulnerable and its financial results. areas are offices that have very limited risk exposure given their low To guard against these risks, the Group has implemented multi-year water consumption. plans to develop its protection measures in order to deal with part of its An analysis of “natural disaster” and “water stress” risks is now IT systems being temporarily or permanently unavailable, as well as any included in the regular prevention visits at Thales’ sites and those of cyber- security threats to these systems. our critical subcontractors and suppliers; Business continuity image risk: any failure by Thales to implement adequate measures • A Disaster Recovery Plan is adapted to the different countries to deal in the fight against climate change could have a specific negative with failures of part of Thales’s IT systems; a methodology to prevent the impact on its corporate image. Thales publishes information on the risk of a failure of the Group’s IT systems is applied to ensure disaster measures it has put in place to combat climate change and the recovery solutions are adapted to the degree of the risk and its results it obtains (see also Section 5.2.4) for its stakeholders operational impact. The plan is based on an analysis of the criticality of (customers, investors, civil society, etc.). In 2017, it was awarded a the different services given their impact on the Group’s operations and rating of A- for “climate change” in the CDP (Carbon Disclosure undergoes regular test runs. Project), placing it in the top 20% of best-performing companies listed. In keeping with the commitments made in 2015, in December 2017 Cybersecurity Thales signed the Paris “French Business Pledge” (1). A plan to protect against risks related to cyber-security has been defined At 31 December 2017, provisions for environmental risks amounted and implemented in countries where the Group currently operates. to €5.7 million. As well as adapting the means of protection already in place, the plan includes the introduction of new measures to heighten protection against cyber sabotage attacks (e.g. Wannacry) to identify and correct any 1.1.2.1.5 Security breaches in respect of sites non-compliance. It is adapted to new regulations (military programming and employees law in France, general regulations on data protection) and to technological developments (e.g. cloud computing). Thales is exposed to attempts to breach the security of its sites: attempts by unauthorised persons to access confidential information, This plan also includes the implementation of “CyberSecurity Operation cyber-attacks, threats to the physical security of facilities and persons, Centres” coordinated at global level, so that anomalies and incidents etc. The occurrence of such events could affect the Group’s intellectual, that could affect the security of systems are identified as early as economic or human capital, the rollout of the Group’s activities and its possible and the appropriate solutions put in place. These measures for reputation and, consequently, its results and financial position. monitoring and sharing information in relation to vectors of attack were further developed throughout 2017. In order to minimise these risk, the Group Security department has put in place a policy for regulating access to and movement around all sites. A number of “Key rules” on the security of Thales’s information systems This policy, applied by the Group’s network of security officers, is in ensure the convergence and coherence of cyber-security and defence keeping with the Group’s defence businesses and the different national measures throughout the Group. Their effective application is regularly regulations requiring it to implement measures to protect its employees monitored and reporting submitted to the Group Information Systems and industrial assets. The Group is therefore required to undergo a large Security department. number of audits and inspections by the national supervisory authorities. Awareness and know- how It has also implemented a global procedure for employee safety and The plan is completed by ongoing efforts to raise employee awareness protection in all of the countries in which they perform their work. In certain of these threats: communication campaigns and training are rolled out countries, this global procedure runs alongside a local intervention to help users ensure the security of their IT systems and remind them of system, which ensures a quick response to incidents. the best practices when using them. Regular forums for discussion Faced with the current heightened terrorist threat, the Group has attended by all employees are also held on site. Since 2017 new increased the level of security and protection for its most sensitive sites. employees have also been made aware of cyber security issues.

(1) French Business Pledge: on the eve of the One Planet Summit on 12 December 2017, 91 French companies of all sizes and from all sectors announced the signature of a shared commitment to climate. Each of these companies put forward its actions as a committed player in the fight against global warming.

20 THALES — 2017 Registration Document Management report — 2017 Financial Information

1.1.2.1.7 Risk related to failure of equipment 1.1.2.1.10 Offsets or technology In some countries, the awarding of major contracts, particularly defence Thales systems and equipment are highly complex and technical and contracts, may be dependent on a legal or regulatory requirement to are likely to be integrated within high-value commercial or military fulfil a direct, semi- direct or indirect offset requirement. The Group’s platforms. A malfunction of any such systems, equipment or technologies ability to factor this into a proposal can be a major source of differentiation could result in client claims or third-party litigation. Thales could and, as such, have a decisive impact on its commercial success or failure. therefore be held liable, notably in the event of damage to property or The non- fulfilment of contractual offset obligations within the requisite personal injury, or in the event that they result in a disruption in the deadlines can result in penalties, the payment of which does not business and activities of its customers. Were they to occur, such events always release the obligor from its obligations. It can also compromise would be liable to impact Thales’s results and financial position, as well the Group’s capacity to expand its activities in a given country. as its reputation. Thales’s order intake in recent years (particularly the order for the Rafale In order to limit the impact, Thales has put Group- wide standards fighter aircraft placed by the Indian authorities in the third quarter of 1 in place (Design Authority, quality, documentation, contractual 2016) has led to a substantial increase in its offset obligations. arrangements and risk management). In addition, Thales follows a policy of maintaining appropriate insurance coverage (see Section Faced with these risks, Thales has set in place a dedicated structure, 1.1.2.4 “Insurance”). both at a central level and for its exporting units and destination countries, which is responsible for integrating and overseeing these obligations as early as the bid phase. The Group also has a specific 1.1.2.1.8 Risk of lower impact of performance unit that is entirely devoted to the management of indirect offsets, Thales improvement measures International Offsets (TIO). In 2014, to support its medium-term financial targets, Thales launched the “Ambition Boost” performance plan to increase the entire Group’s 1.1.2.1.11 Market trends performance. The markets on which Thales operates are broadly correlated to the This global performance plan provides a common framework within current economic backdrop, but can also be impacted by specific which the units can implement plans and initiatives adapted to their factors: technological breakthroughs, the impact of digitalisation, drastic own issues in terms of performance improvements. Five new changes in Business Models, deregulation, new standards, real or cross- disciplinary initiatives are also now in place to complete and perceived increase in the threat of terrorism, changes in oil prices, strengthen the performance plans: Going Global, Digital Transformation, conflicts or major political change, epidemics and disasters that could Competitiveness, Diversity & Inclusion and Leadership & Governance. have an impact, however temporary, on these markets. This is particularly The earnings and financial position of Thales could be negatively true of the civil aviation market. impacted if the initiatives planned under the Ambition Boost framework As part of the development of its activities related to in-flight broadband, could not be fully implemented or if they failed to generate the expected Thales entered into a strategic agreement with SES in 2016 to secure results according to the original timetable. Moreover, the cost of bandwidth over the Americas. Under this agreement, Thales committed implementing these initiatives could end up being higher than expected. to an annual bandwidth purchasing programme over the 2016 to 2028 Thales has introduced specific monitoring for performance improvement period and the payment to SES of a set minimum fee. The profitability of initiatives and the Group’s corporate management regularly reviews the this business could therefore be affected if the sale of the broadband progress of the main initiatives. services was lower than forecast for several consecutive years. The main risk mitigation factors are Thales’ efforts to bolster and promote 1.1.2.1.9 Competitive environment the offer to airlines and the flexibility built into the agreement. In the space sector, the telecommunications satellite market is affected Thales operates in highly competitive markets, both in terms of by constant technological developments resulting in a decrease in the international groups and in terms of local or niche companies in certain Megabyte transmission cost. Some operators face complex market segments. This competitive pressure could negatively impact technological challenges which force them to postpone their investments. Thales’s commercial position, sales and profits. In particular, uncertainties remain in the articulation between new It could also intensify in a less favourable economic environment and constellation models and the more traditional satellites in high orbit there is no guarantee that Thales will be able to position itself which are becoming increasingly technologically advanced, allowing successfully against its current or future competitors. for the development of higher capacity solutions. Thales is developing its offer and investing in breakthrough technologies to embrace these In order to limit the impact of this risk, Thales continues its research and developments. development investments in order to provide more competitive and differentiating elements, and it also works to structure and upgrade its More generally, to limit the impact of market risk, Thales constantly product offer in order to always best meet the needs of its customers in seeks (i) to adapt its product lines to foreseeable changes in demand both the defence and commercial markets. and to improve their competitive performance and industrial flexibility in line with fluctuations in activity, and (ii) a comprehensive strategy to The Group’s success and performance in relation to its competitors also balance its business portfolio. depends on its capacity to recruit and retain quality employees with the requisite skills and commitment. Thales therefore attaches great importance to its attractiveness and positioning as a top employer, ensuring a positive external image which will boost recruitment and an internal work environment that will help retain employees (see Section 1.1.2.1.3- b) ”Talent development”).

2017 Registration Document — THALES 21 2017 Financial Information — Management report

1.1.2.1.12 Dependence on public procurement consequences on the activities and financial performance of Thales. It could notably lead to a higher degree of volatility between the pound Thales generates a significant share of its business from governments, sterling and the euro, in interest rates and in the value of plan assets particularly in the defence markets in many countries. In these markets, covering the Group’s pension commitments in the United Kingdom. The public spending is dependent on political and economic factors and is management of these financial risks is part of the procedures set in therefore likely to fluctuate from one year to the next. A reduction in the place by the Group and described in Section 1.1.2.3 “Financial risks”. budget resources of government customers could, for example, The risk of an increase in tariff barriers is automatically reduced by generate delays in order booking, contract execution and payments, or Thales’s predominant use of local country production resources a mean a cut in funding for research and development programmes. strategy which also tends to reduce the effects of greater volatility in the pound since sales and production costs are essentially denominated in Thales has based its strategy on a balanced portfolio of defence the same currency. operations and civil operations, each accounting for approximately 50% of sales. The overall solidity of the portfolio is underpinned by a diversified order base with a unit value of less than €100 million. 1.1.2.1.14 Risks relating to strategic Finally, the broad geographic spread of Thales’s business, particularly acquisitions and investments through its international operations, ensures further diversification of its customer base. Thales regularly looks to acquire new companies (as well as making strategic investments and combining business activities through joint ventures, etc.) in order to round out its technological portfolio and 1.1.2.1.13 Political risks strengthen its presence in certain markets. Integrating these businesses into Thales could prove more difficult and take longer than envisaged, A significant proportion of Thales’s sales is subject to the risk of requiring more significant involvement by senior managers and the economic and/ or political instability in the countries in which the Group teams concerned and, in turn, negatively impacting the Group’s results operates. The materialisation of these risks may affect the Group’s and financial position. financial position and profitability. In addition, there are no guarantees that the newly acquired companies In particular, a change in government, major political event, armed will perform as well as expected in accordance with the assumptions conflict, act of terrorism, sharp deterioration in the balance of payments, which form the basis of their valuation and the investment decision. industrial action, strike or protest could lead to various types of risks. Significant variance could lead to the amortisation of goodwill and These include: other intangible assets, thereby negatively impacting Thales’s results • more restrictive currency control, with limitations or exclusions on and financial position. withdrawing currency from a customer country, preventing it from In addition, the integration of a newly acquired company into the honouring its financial commitments to Thales; Group may prove difficult or fail to generate all the expected synergies • impairment of assets because of devaluations of the local currency and other benefits. Such events could have a negative impact on the or other measures taken by public authorities that significantly affect Group’s results. the value of operations; The significance of these risks and their impact varies depending on the • expropriation (by confiscation, nationalisation, requisition, etc.) or target company’s size. the forced sale of Thales’ interest in a local company, or, more Before any planned acquisitions, Thales conducts audits and due broadly, discriminatory measures that compromise Thales’s operations diligence with the assistance of external consultants where necessary, in in a country; order to analyse the fundamentals of the target company. This due • a security situation entailing a risk of bodily harm for its employees diligence is more limited when the target company is listed, due to the and/ or security breaches at its facilities, which severely limit or applicable regulations. prevent Thales from assuming its performance obligations under a A review is also conducted at each key stage in the acquisition process contract, or reduce or prohibit the use of its local industrial assets; to confirm Thales’s interest and set the necessary conditions and • an unexpected breach of a contract or commitment; parameters to ensure a successful outcome. The newly acquired company is then integrated into Thales’s financial reporting system so an unfair call of a bond or a guarantee; • that its performance can be monitored. the non- certification of documents eligible for payment, or non-payment • An internal audit is carried out for all major acquisitions within 18 months on the due dates stipulated in a contract, that prevent the of the finalisation of the acquisition. These audits assess the strength of anticipated progress of that contract. the business plans that led to the decision, the integration of the newly To limit the financial impact of the risks listed above, Thales has put in acquired company into the Group, the implementation of synergies and place a methodology to identify and analyse the risks, determine the level of performance in relation to the assumptions made. The audit measures to reduce them and define roles and responsibilities, within reports are sent to the Group’s corporate management and are summarised Thales, for the teams involved in the financial engineering of contracts. for the Audit and Accounts Committee. This enables Thales to use public or private insurers to cover the risk of contract interruption, credit risk or the risk of unfair calling of sureties. 1.1.2.1.15 Risks related to minority investments It can also make use of financial instruments such as notified or confirmed letters of credit, receivables discounting without recourse or Thales generates part of its sales from companies in which control is export credit facilities. shared with, or exercised by, other partners; in accordance with the In June 2016, by referendum, the United Kingdom, which represents accounting principles in force on 1 January 2017, these companies are approximately 9% of Group sales and 6,400 employees, voted to consolidated using the equity method(1). leave the European Union. This decision could have a number of

(1) See the list of companies accounted for under the equity method on pages 79 and 80.

22 THALES — 2017 Registration Document Management report — 2017 Financial Information

By definition, the share in net income of equity-accounted companies is a) Business ethics included in Thales’s EBIT (1) and adjusted net income (1). A deterioration in Thales’s business encompasses a variety of sectors in more than 50 countries. the performance of these companies may therefore impact on the Infringement of applicable laws and regulations may have severe legal Group’s income, financial position and achievement of EBIT objectives. and financial consequences and seriously harm the Group’s reputation. Since Thales’s influence over these minority investments varies, decisions An integrity programme linked to corruption risk prevention has been that are detrimental to the interests of Thales may be taken, without in place in all Group entities for more than 15 years. It is based on a Thales necessarily having the means to oppose them. Code of Ethics for all Group employees that is regularly updated in line In addition, the risk of disagreement or deadlock, inherent in any with external and internal reference systems and is posted on the Group jointly-controlled entity, exists, particularly in those where important intranet. With a preface by the Chairman and CEO, it reaffirms in decisions require the unanimity of members or where there are limited particular the principle of zero tolerance for any act of corruption. exit rights. Thales’s integrity programme was certified by independent third parties Mazars and ADIT in 2014. Lastly, the application of management rules and principles in these 1 entities may differ from those adopted by Thales for entities over which In 2017, the Group reviewed its integrity programme to bring it in line it exerts exclusive control. This also means that the ability to carry out with French Law 2016- 1691 of 9 December 2016 on transparency, the analyses and give instructions regarding financial or operational data, fight against corruption and the modernisation of the economy (known or even to access this data, may be more limited than in the entities as the “Sapin II Law”). over which Thales exerts exclusive control. The various components of the integrity programme form an integral As a result, the Group aims to define appropriate governance methods part of Thales’s reference system (Chorus 2.0), particularly the processes by seeking to be represented on the Board of Directors (or a similar which govern the management of bids and projects, purchases and decision-making body), and more generally, to negotiate contractual subcontracting, and the use of agents and consultants. In addition to provisions that are in Thales’s best interests. its internal control procedures, the Audit, Risks & Internal Control Department conducts regular compliance and integrity audits on the various components of the model. 1.1.2.2 Legal and compliance risks The anti- corruption policy is outlined in Section 5.3.2.1 “Anti-corruption”.

1.1.2.2.1 Compliance with laws and regulations b) Export control and economic sanctions The export of many products, technologies and systems for military and The Group operates its business, both nationally and internationally, dual use by Thales is subject to obtaining licences issued by the French in a strict and evolving complex legal and regulatory environment. and foreign authorities in advance. This environment encompasses various fields such as company law, stock exchange law, tax law, employment law, intellectual property, In addition, the French, European and foreign regulations including the personal data protection, export control, economic sanction measures, extraterritorial regulation issued by the Office of Foreign Assets Control anti- corruption, influence peddling and money laundering. (OFAC), establish a framework of embargoes and economic and criminal sanctions on any natural person or legal entity, or any state in Despite the steps taken by Thales in the form of organisation and breach of these provisions. internal procedures to comply with all applicable legislation, risks still exist due to their inherent nature, the interpretative powers of regulatory There are no guarantees that (i) the export controls to which Thales is agents, the extraterritorial REACh of certain regulations, and changes in subject will not be tightened; (ii) new-generation products or systems legal / judicial precedent and sanctioning powers. developed by Thales will not be subject to similar or tighter controls; (iii) geopolitical factors will not make it impossible for Thales or its suppliers In most cases, regulators in conjunction with the judicial authorities have to obtain export licences for certain customers or make it more difficult the right to initiate legal proceedings, which could expose the Group or for Thales to execute previously signed contracts or will not give rise to its employees to civil, administrative or criminal rulings. Such rulings could, economic sanctions (embargoes) which could prevent Thales from if applicable, involve a temporary ban on trading, which would in turn conducting or continuing to conduct business with certain countries or have an adverse impact on the Group’s profitability and financial position. certain customers. Further limitations on access to certain international Using a risk map approved by the Risk Management Committee, military markets could thus have a negative impact on Thales’s business, the Audit, Risks & Internal Control Department carries out assessments financial position and profitability. and audits of the implementation and improvement of compliance plans The Group has put in place an ISO 9100 certification process to ensure within the Group’s units. Compliance measures rely for these needs on compliance with the regulations and controls applicable in terms of networks of compliance officers who may be specialists (in Trade export and the economic sanctions in force. This process includes Compliance, international trade, etc.) and on risk advisors responsible procedures, specific IT tools, employee awareness programmes, with, for the prevention of each of the major risks identified and monitored by in particular, e-learning modules, an annual internal audit plan and a the Risk Assessment Committee. system to monitor changes in the legislation, regulations and restrictions The Audit, Risks & Internal Control Department takes into account these following economic sanctions relevant to Thales’s business activities. compliance areas when preparing its audit plan. Operating units have access to a network of specialists within the Group, who are responsible for monitoring the correct application of compliance rules decided at Group level as well as tracking requests for the required authorisations and the conformity of their implementation.

(1) Non- GAAP measures, see definition and computation in Section 1.1.1.2.

2017 Registration Document — THALES 23 2017 Financial Information — Management report

c) Competition law Initiatives are already under way within the Group to launch this compliance process, including insertion into contractual clauses on Thales’s business activities are subject to a wide range of national and personal data protection, the drafting of factsheets, the acquisition of a international regulations mainly aimed at combating anti-competitive tool to record Thales’s processing of personal data. practices, concerning suppliers, customers, partners and the competitors themselves. 1.1.2.2.2 Litigation Infringement of these rules could lead to severe sanctions, such as fines, payment of damages and interest, and statutory prohibitions and Due to the nature of its business, Thales is exposed to the risk of criminal penalties. Such sanctions could also have a serious impact on technical and commercial disputes. the Group’s reputation. To prevent disputes or limit their impact, Thales’s policy is to To prevent these risks, a dedicated team of experts carries out systematically seek alternative dispute resolution mechanisms. This competitive assessment on sensitive agreements and projects, notifying policy is reviewed on a regular basis to take into account changes in the competent regulatory authorities in Europe or abroad as required. In the Group’s core areas of business and is backed by employee training addition, the Group has initiated a programme to raise awareness of programmes. these rules, in particular through the drafting of directives, the implementation of online training tools and dedicated training In addition, for several years now Thales has implemented a procedure programmes for the most exposed employees. to centralise all civil, commercial and criminal litigation and claims. These are handled by the Corporate Legal Affairs department, with the d) Intellectual property support of the Group companies concerned. Thales is exposed to two main types of intellectual property risk: In October 2017, Thales was notified of an arbitration award in a dependence on third-party technology and the infringement of intellectual commercial dispute between the Republic of China and a group of property rights. three French manufacturers, including Thales Systèmes Aéroportés, a Thales subsidiary. As a result of this arbitration award, which pertains to To reduce the risk of reliance on critical third- party technology, Thales a contract signed in 1992, the manufacturers were ordered to pay a has implemented a process to identify and manage each situation with total sum of €227 million including interest, of which €64.2 million a precise, strategic “Make / Team / Buy” (MTB) plan. was payable by Thales Systèmes Aéroportés. The corresponding Given the nature of its activities and the specific features of its products, charge was recognised under “Disposal of assets, changes in scope of Thales conducts most of its research and development work in- house consolidation and other” in the financial statements as at and focuses on controlling the key technology which is critical to the 31 December 2017 (see Note 3.2 of the consolidated financial business. The size of Thales’s internal intellectual property portfolio (over statements). 16,500 patents, as well as software and know-how) and its presence There are no other government, judicial or arbitration claims, of which throughout the value chain (equipment, systems and systems of systems) the Group is aware, which are pending or threatened, which had, in reduce its reliance on third-party technology. As a result, Thales’s the course of the last 12 months, or which could have a material impact dependence on such technology can be considered low. on the financial position or the profitability of the Company and/ or To reduce the risk of third-party actions for alleged infringement of their the Group. intellectual property rights by Thales entities, the Group identifies and analyses this risk in the context of its own patent filing procedures and /or when embarking on technical research or product development. 1.1.2.3 Financial risks In the event of a third- party infringement claim against a Thales company, the legal and technical analysis of the allegedly infringing 1.1.2.3.1 Liquidity products and intellectual property rights are handled centrally by Thales experts, with the assistance of specialist external consultants where The Group’s liquidity risk is the risk of it being unable to meet its cash needed. needs out of its financial resources. In particular, it relates to Thales’s level of exposure to changes in the main market indicators that could Thales may be exposed to the risk of infringement of its intellectual lead to an increase in the cost of credit or even to a temporary property rights by a third party. To limit this risk, Thales contractually limitation of access to external sources of financing. protects its rights in its contracts and agreements, engages in an active policy for filing and maintaining its patents, carries out technological The Group manages this risk by trying to anticipate its cash needs and monitoring on the equipment and systems sold by third parties to ensure ensures that these are covered by the Group’s short-term and long-term that its own intellectual property rights are not infringed and, where financial resources, as follows: applicable, takes all necessary measures to ensure these rights are shareholders’ equity, listed by caption in Note 8 to the consolidated respected. • financial statements; e) Personal data protection • gross debt, listed by maturity in Note 6 to the consolidated financial statements; In the context of the application, effective 25 May 2018, of Regulation 2016/ 679 on the protection of natural persons with regard to the • committed, undrawn bank credit facilities used as backup to the processing of personal data and on the free movement of such data, commercial paper programme and as a financial reserve. These Thales has committed to bringing its policies into line with this European are described in more detail in Note 6 to the consolidated financial regulation. statements. At 31 December 2017, the Group also had an undrawn bridge loan to finance its proposed offer for the acquisition of A Data Protection Officer has been appointed to coordinate Gemalto. compliance with this new European regulation within the Thales group. The Data Protection Officer relies on a network of contacts in the The principle of centralising the entities’ short- term assets and liabilities different functions and entities both in France and the other countries (cash pooling) is applied to the combination of entities in the same where the group operates. currency zone (eurozone, sterling zone, dollar zone and Australian dollar zone, etc.) and, in some cases, in the same country.

24 THALES — 2017 Registration Document Management report — 2017 Financial Information

By consolidating and centralising the cash requirements and surpluses likelihood cause Thales’s rating to be lowered, due mainly to the of its units, the Group is in a position to: change in the Group’s financing structure. • simplify cash management and match the cash positions of units to The decrease of Thales’s credit risk rating would not trigger the financial produce a single consolidated position that is easier to manage; covenants included in its financing contracts. The coming into effect of the unique clause providing for accelerated repayment of bank credit gain prime access to financial markets through the parent • facilities would only apply in the event that the French government no company’s financing programmes, rated by S&P Global Ratings longer held its golden share and, simultaneously, the ratio of consolidated and Moody’s (see below). net financial debt to EBITDA (earnings before interest, taxes, depreciation At 31 December 2017, cash recorded under consolidated assets amounted to and amortisation) were to exceed 3. €4,282.7 million (compared with €3,616.9 million at end-2016), including: A lower rating would result in an increase (capped) in the margins • €3,450.5 million held by the parent company and available for applicable to the committed credit facility of €1.5 billion (described in immediate use (€3,183.1 million in 2016); Note 6 to the consolidated financial statements); at the same time, these margins would be improved (with a minimum threshold) in the event of a 1 €832.2 million in the credit balances of subsidiaries (€433.8 million • rating upgrade. in 2016), most of them outside France. This figure includes payments received in the last days of the financial year and subsequently transferred to the cash pooling account. 1.1.2.3.2 Interest rates Cash at bank and equivalents at year- end is invested solely in sight and Thales is exposed to interest-rate volatility and in particular its impact on term bank deposits or in money market funds. At the date of publication, the conditions associated with variable-rate financing. To limit this risk, Thales’s risk ratings were as follows: Thales operates an active interest rate hedging policy. Moody’s S&P Global The Corporate Financing and Treasury Department consolidates data Ratings on Thales’s exposure to interest rate risk and uses appropriate financial Medium & long- term loans A2 A- instruments to hedge those risks. Outlook Negative Negative Thales policy is to control interest rate and counterpart risks and to watch optimise its funding and banking operations. Commercial paper & short- term loans Prime- 1 A2 The breakdown of Thales’s debt by type of interest rate is described in Note 6 to the consolidated financial statements. The table below Moody’s and S&P Global ratings downgraded their outlook (from summarises the Group’s exposure to interest rate risk before and after “stable” to “negative” and “negative watch” respectively) following the hedging. Based on the average net cash (taking into account hedging announcement on 17 December 2017 of the planned cash tender offer instruments), a 1% rise in interest rates would impact net financial interest for Gemalto. If this acquisition, partly financed from the Group’s own by €27.4 million in 2017 (€21.6 million in 2016). cash flow and partly through borrowings, goes ahead, it would in all

(31/12/2017, in € millions) < 1 year > 1 year Total

Fixed rate Variable rate Fixed rate Variable rate Fixed rate Variable rate

Financial liabilities (512.1) (192.1) (891.8) (47.3) (1,403.9) (239.4) Financial assets – 4,614.7 – – – 4,614.7 Net exposure before impact of derivative instruments (512.1) 4,422.6 (891.8) (47.3) (1,403.9) 4,375.3 Derivatives 296.2 (296.2) 695.4 (695.4) 991.6 (991.6) Net exposure after impact of derivative instruments (215.9) 4,126.4 (196.4) (742.7) (412.3) 3,383.7

1.1.2.3.3 Foreign exchange b. The accounts of Thales’s subsidiaries located in countries where the functional currency is not the euro are translated into euros in the Due to the international nature of its business, Thales is exposed to the Group’s consolidated financial statements. A fall in these currencies risk of exchange rate fluctuations. against the euro is likely to have a negative impact on the accounts. Its impact on profitability is limited, however, since the cost base of a) Business-related currency risk these subsidiaries is essentially in the same currency as their sales. The main currencies concerned are the pound sterling, the US Business-related currency risk occurs when some of the business is billed dollar, the Canadian dollar and the Australian dollar. in a currency other than that of the related costs. c. For certain Group businesses (commercial avionics and microwave a. As a general rule, Thales is structurally immune to exchange rate systems, commercial space, etc.), the US dollar (“$” or “USD”) is the fluctuations for a significant part of its business activity. Around 40% reference transaction currency. For business activities outside the of Thales’s sales are generated in the eurozone, where a significant dollar zone (the in-flight entertainment and connectivity business is portion of its industrial operations are located. More generally, the based essentially in the United States and is therefore naturally reinforcement of the Group’s international industrial footprint allows it immune to this risk), a specific currency risk hedging policy is to produce and invoice in local currency, which helps to reduce implemented: exchange rate risk on local sales. – for equipment transactions (avionics and microwave systems), this policy is defined on the basis of sales forecasts in USD, after accounting for corresponding purchases in USD. For these transactions, net exposure to dollar risk represents around 3.5% of the Group’s total sales for 2017,

2017 Registration Document — THALES 25 2017 Financial Information — Management report

– for longer-term programmes in markets traditionally denominated currencies (EUR, GBP and CAD), would have increased (decreased) in USD (primarily commercial space activities), each bid is shareholders’ equity by approximately €104 million at examined for profitability in light of the effect of currency 31 December 2017 (€153 million at 31 December 2016). The fluctuations, after accounting for corresponding purchases in premium /discount component is not eligible for hedge accounting and USD, and, if necessary, is specifically hedged through market is recognised through profit and loss. In 2017, the change in market transactions (forward exchange- rate contracts and options). value of the premium/ discount was - €65.3 million (compared to - €54.0 million in 2016). Where necessary, a similar approach is adopted for other Thales activities if a customer specifically requires a contract denominated in The change in value of financial instruments used to hedge commercial USD on an ad hoc basis. bids which are not eligible for hedge accounting is recognised in profit and loss. A decrease (increase) of 5% in the dollar against the main Overall, net exposure amounted to around 2% of the Group’s currencies (EUR, GBP and CAD) would have had no impact on profit or total sales for 2017; loss at 31 December 2017 or 31 December 2016. – as well as this direct dollar risk, which concerned around 5.5% in Foreign currency-denominated financial debt does not generate any total of consolidated sales at end- 2017, the Group is also exposed exposure in profit and loss, as it is either denominated in the functional to an “indirect” dollar risk on contracts denominated in currencies currency of the entity in which it is recognised or is used as a net foreign other than the dollar. This occurs when it is bidding against investment hedge. companies that benefit from a cost base in dollars. At least one quarter of total sales may be exposed to this “indirect” dollar risk. b) Management of risks relating to foreign The “dollar risk” is thus the main currency risk that Thales needs to manage. currency-denominated assets The figures corresponding to the management of business- related dollar The Group may hedge a portion of its foreign currency-denominated risk are as follows: assets, mainly those likely to be disposed of. The main criteria for • $2,496 million, the amount of financial instruments hedging net firm determining whether or not a given foreign currency denominated asset commitments (US dollar risk against the euro, Canadian dollar and should be hedged are as follows: pound sterling) at 31 December 2017 compared with • the nature of the business operations involved; $2,985 million at 31 December 2016; • the structure of Thales’s commitment with respect to jointly held companies, • financial instruments (forward transactions) used to hedge bids in US in particular the specific features of the shareholders’ agreement in dollars against the euro, Canadian dollar and pound sterling each joint venture. amounted to zero at 31 December 2017 versus $310 million at 31 December 2016. The actual application of this policy also depends on: Operating receivables and payables denominated in foreign currency • the objective of optimising hedges in light of market conditions are exchange- rate hedged and therefore not exposed to currency risk. (availability of foreign currency, interest rates, hedging rate, etc.); The change in the value of financial instruments (forward transactions) • the risks inherent in the future value of the assets being hedged and used to hedge cash flows is recognised in equity for the spot rate the nature of the business of the corresponding subsidiaries. component. A decrease (increase) of 5% in the dollar against the main

• SUMMARY OF ASSET RISKS AT 31 DECEMBER 2017 FOR THE MAIN CURRENCIES

(in € millions) GBP zone USD zone AUD zone Other currencies Total & eliminations

Assets 1,989.6 1,652.5 963.9 17,037.5 21,643.5 Liabilities 2,093.1 1,424.3 489.5 12,081.1 16,088.0 Net position before hedging (103.5) 228.2 474.4 4,956.4 5,555.5 Hedge – – – – – NET POSITION AFTER HEDGING (103.5) 228.2 474.4 4,956.4 5,555.5

1.1.2.3.4 Shares Thales’s pension commitments in the United Kingdom amounted to €4,431.8 million, hedged by €3,248.7 million in investments, Thales was not exposed to any material equity risk at end- 2017, excluding representing an underlying shortfall of €1,183.1 million. the risk on treasury shares. Changing market parameters can lead to a substantial increase or At 31 December 2017, Thales held 568,739 treasury shares, representing decrease in the amount of the shortfall and the annual costs of defined- 0.27% of the share capital. benefit plans. At 31 December 2017, the main sensitivity factors were as follows: 1.1.2.3.5 Pension commitments • a decrease or increase in the discount rate applied to liabilities, which could increase or reduce the underlying shortfall; this variable Defined-benefit pension plans are in place for certain Group employees, is partly offset by changes in the value of fixed- rate hedging bonds mainly in the UK, which are financed by the Group under the provisions held as plan assets and interest rate swaps; of the applicable domestic legislation. As such, at 31 December 2017, • changes in the total return on investments in equities and other assets;

26 THALES — 2017 Registration Document Management report — 2017 Financial Information

• changes in the forecast inflation rate; b) Credit risk relating to public sector customers a substantial change in mortality tables; • Public, government and institutional customers account for around 75% exchange rate fluctuations (mainly sterling against the euro). • of Thales’s sales. Thales works with a large number of countries. Some Thales has introduced six- monthly reporting on its pension plan of them could present a significant credit risk which could, for example, commitments and makes regular projections measuring the sensitivity of lead them to suspend an order in production, or render them unable to underlying shortfalls to possible market changes taking into account pay on delivery, as agreed under the terms of the contract. To limit its their correlations. In the UK, Thales plan assets are managed by trustees exposure to these risks, Thales takes out insurance with export credit in accordance with the applicable regulations and in consultation with agencies (such as BPIFrance) or private insurers. the Group. Plan assets are allocated with regard to the long- term At 31 December 2017, only three customers accounted for annual sales maturity of the commitments they cover. in excess of €500 million: the French government (around €2.8 billion), Additional information on the amount of commitments and the annual the UK government (around €1 billion) and the Australian government costs linked to pension and other employee benefits, as well as the (around €0.7 billion). At 31 December 2017, these three countries had valuation and allocation of plan assets and the sensitivity of net first-class or high-quality ratings (France was rated AA by S&P and Aa2 1 commitments to different actuarial assumptions is given in Note 9.3 of by Moody’s, the United Kingdom was rated AA by S&P and Aa2 by the consolidated financial statements at 31 December 2017. Moody’s, and Australia was rated AAA by S&P and Aaa by Moody’s).

1.1.2.3.6 Sureties, endorsements and guarantees granted 1.1.2.4 Insurance by Thales (parent company) Thales’s Insurance and Risk Management department, based at head office and reporting to the SEVP Finance & Information Systems, Thales (parent company) issues sureties, endorsements and guarantees, is responsible for insurance activities and insurable risk management. primarily in support of commitments undertaken by its subsidiaries It is in charge of Group operations and oversees policy implementation through commercial contracts. The Group’s Corporate Financing and by Group companies. Treasury Department centralises the issuance of these sureties, endorsements and guarantees. The Group is covered against the financial consequences of the risk of accidental damage suffered or caused by property or people using They are issued out of an envelope of €4 billion, which is regularly appropriate insurance policies with leading international insurance and delegated by the Board of Directors to the Chairman and CEO. Before reinsurance companies. each time the Chairman’s authorisation is renewed, the extent of use of this envelope, which is monitored by the Corporate Financing and The insurance policies arranged by the Group to cover these major risks Treasury Department, is notified to the Board. relate to areas such as: As of 31 December 2017, outstanding sureties, endorsements and • damage to property and consequent operating losses; guarantees granted by Thales (parent company) to its subsidiaries • transport; amounted to €12,760.4 million. These guarantees include all • assembling and testing; commitments given in relation to Thales Alenia Space, which are • aviation liability, including liability for aeronautical products and backed by a counter guarantee from Leonardo in proportion to its hull / test flight insurance; interest in the capital of Thales Alenia Space (33%). • liability for space products; risks of damage to or by naval vessels by subsidiaries, as naval Thales has initiated a programme to control risks related to these • equipment suppliers; sureties, endorsements and guarantees through the parent company general third- party liability; and to optimise the financial terms of transactions guaranteed using • environmental liability; these instruments with the following main objectives: • • liability of executive officers and directors; • to limit the risks to those corresponding to normal commitments in • individual accident – repatriation assistance for employees on commercial contracts, particularly in terms of volume and duration; assignment; • cyber liability. • to limit their issuance to commitments made by wholly owned subsidiaries, with guarantees commitments involving business The Group had no major loss in 2017. combinations or joint ventures only being issued in proportion to the The Group’s policy is to arrange cover on the insurance market based Group’s interest or counter-guaranteed by the other shareholder in on the rates and within the limits that it considers reasonable, in view of proportion to its interest; the conditions offered by the market. Insurance policies covering the • to allow its subsidiaries to benefit, where appropriate, from the major risks may be limited in terms of guarantee (application of limits), credit quality of Thales (parent company), by controlling the financial while general exclusions for the entire market (e.g. asbestos) also apply terms of guaranteed transactions. to Thales. In 2017, the maximum coverage limit for insurance against damage to 1.1.2.3.7 Customer credit property and consequent operating losses was €1.3 billion. This limit takes into account the estimated maximum possible loss caused to an Credit risk relates to the risk that a party to a contract will default on its industrial site which the Group could incur in this regard. In 2017, the commitments or fail to pay what it owes. Group renewed a specific cover against cyber incidents (IT data attack) and damages that could compromise its internal IT systems. a) Risk of default by private sector customers Levels of liability cover depend on the quantification of a reasonable Non- governmental customers (aircraft manufacturers, airlines, private claim expectancy for Thales, as identified by the risk map of the main infrastructure operators and industry) account for approximately 25% of business activities and at Group level, and on cover capacity available Thales’s sales. These customers may encounter major and /or prolonged on the insurance market. The insurance coverage for aviation liability financial difficulties that could lead to payment defaults or order commitments, which is covered by a specific programme, is capped at cancellations. Such occurrences could have a negative impact on the $2 billion. Group’s sales, profitability and financial position. The insurance industry depends on the financial markets. There are To mitigate these risks, Thales conducts regular analyses of the ability of therefore no guarantees that Thales will be able to maintain current customers to meet their obligations. When necessary, Thales may request levels of insurance under similar financial conditions in the future. bank guarantees or corporate guarantees, or may use credit insurers.

2017 Registration Document — THALES 27 2017 Financial Information — Management report

In order to reduce its exposure to insurance market volatility, Thales principal operating sites and infrared thermography inspections by an insures major risks on a two- tier basis: outside organisation specialised in the prevention of electrical damage. • the Group’s contribution, through captive insurance and reinsurance In accordance with Group processes, measures were taken to minimise companies, towards the settlement of claims, to a maximum net business interruption and the consequences of any unforeseen events. retention of €12 million per year, for damage to property and An organisational structure and crisis management tools are in place to consequent operating losses, transport, general third-party liability, deal as efficiently as possible with the immediate consequences of a assembling and testing, development and space risks; catastrophic event and to take the necessary emergency measures. • transfer to insurers of payment for catastrophic or high intensity A risk prevention policy for critical supplier sites was also pursued to losses. reduce the risk of operating losses for Thales in the event of an accidental disaster at one of their sites. In parallel, an active Prevention and Protection policy for industrial sites is designed to reduce the magnitude and frequency of the accidental Furthermore, Thales continues to roll out an insurance policy for its staff risks of fire or explosion and to detect other exposures, such as to cover them in the context of their professional activity. Lastly, specific environmental or natural disasters and the vulnerability of critical and /or local cover has been arranged to comply with the regulations in industrial facilities. In 2017, more than 70% of the assets insured were force and to satisfy the specific requirements of certain business the subject of a “multi-peril” audit by the insurers during their visits to the activities or projects, particularly public- private partnerships.

1.1.3 Internal control and risk management

This section was submitted to the Audit and Accounts Committee at its Risk management gives executives an objective and comprehensive meeting of 15 February 2018, attended by the statutory auditors. It was vision of potential threats and opportunities to which the Group is exposed, prepared on the basis of the main conclusions from the internal audit, enabling them to take measured and considered risks and guiding them in internal control and risk management work carried out by the Group in their decisions on the allocation of human and financial resources. 2017. The results of this work were reviewed at the various meetings of the Risk Assessment Committee and the Risk Management Committee • Promote the consistency of action with the values of the Group (see Section 1.1.3.5) during the year, and also at meetings of the Audit The Group’s approach to risk management is consistent with its values, and Accounts Committee held in 2017. particularly with regard to the strict compliance of its business activities This section is based on the AMF reference framework on risk with national and international rules and legislation. management and internal control systems, updated on 22 July 2010. • Involve the Group’s employees in a shared vision of the main It covers all the suggested items, albeit sometimes in a different order. risks and make them aware of the risks inherent in their work

1.1.3.1 Objectives and definitions b) Definition of internal control at Thales The Group uses as a reference the international standards of COSO 2013 (Committee of Sponsoring Organizations of the Treadway a) Objectives of risk management Commission) and IFACI. Thales adheres to the risk management objectives formalised by the According to the definition used by Thales, internal control is a process AMF in its reference framework. Risk management is a management that the organisation implements with the intention of providing reasonable tool that Thales uses to: assurance as to the achievement of the Group’s objectives, through: • Create and preserve the value, assets and reputation of the Group • the effectiveness and efficiency of internal processes; Risk management identifies and analyses the main threats and potential • accounting and financial internal control aimed at: opportunities to which the Group is exposed. By anticipating the – ensuring the reliability of the information used internally for potential impact of these risks, it is intended to more effectively preserve management and monitoring purposes as well as for the the value, assets and reputation of the Group. preparation of the published accounting and financial information, – preventing the risk of fraud ; Secure the Group’s decision-making • legal compliance, which is intended to ensure compliance with and processes to help it achieve its objectives • regulatory requirements. Risk analysis is designed to identify the principal events and situations which could significantly impact the achievement of the Group’s c) Scope of application and limits objectives. Controlling such risks helps to achieve those objectives. Thales implements its corporate risk management and internal control Risk management is integral to the Group’s decision- making and approach in the companies it controls. operational processes. It is one of the tools for steering and assisting in These internal control and risk management processes contribute to the decision- making. achievement of the Group’s objectives without providing an absolute guarantee because of the limitations inherent in any system, such as the need to take into account the cost /benefit ratio leading to acceptance of a certain level of risk, and due to external uncertainties beyond the Group’s control.

28 THALES — 2017 Registration Document Management report — 2017 Financial Information

1.1.3.2 Control environment The corporate risk assessment function Since 2007, the Audit, Risks & Internal Control Department has For most of its operations, the Group is subject to a control environment included a corporate risk analysis function. This is the responsibility of a imposed by its customers and regulatory authorities (Ministries of dedicated team, separate from the audit team, which provides support Defence and Industry, Authorities in its customers’ countries, Commercial to all operating and functional managers to help them identify and Aviation Authorities, etc.), which require strict certification and controls. assess the risks to which their activities are exposed and to institute These specific constraints are in addition to its statutory obligations and the means to manage or reduce these risks. It is also responsible for are an integral part of the Group’s control environment. developing and updating internal control assessment tools, such as the yearly attestation letter and the internal control questionnaire, and a) The main parties in risk management and internal control collating and analysing the responses given by the operational entities in these annual questionnaires. Thales is organised according to a two- dimensional matrix structure comprising Global Business Units and countries. The internal audits conducted by the Audit, Risks & Internal Control Department are primarily chosen and planned based on this risk 1 The Global Business Units are organised into business lines, which • analysis. cover a coherent range of products, solutions and services. For the products, solutions and services entrusted to them, the Finance function business lines have worldwide responsibility for strategy, product policy The Group’s Finance Department oversees the Company’s accounting and marketing, competitiveness, customer access, contractual and financial operations. Its central organisation comprises: commitments, engineering, development, production, integration, quality and services, industrial organisations, optimisation of resources, • an accounting and consolidation function, responsible for preparing and economic performance (contribution to EBIT and cash flow). and presenting the Group’s consolidated financial statements; • In the region assigned to them, country managers are responsible • a management and budget control function, which analyses the for the successful implementation of every aspect of Group policy Group’s financial data and produces monthly reports comparing and handle relations with customers and local partners. actual results with the budget and comparable prior-year periods. On this occasion, financial forecasts for the current half-year and The main countries in which the Group operates (Australia, Canada, financial year are reviewed and discussed so as to steer the business France, Germany, the Netherlands, the United Kingdom and the United in order to achieve the objectives set; States) share responsibility with the Global Business Units for local bids and projects. Country managers are involved in all decisions taken • a tax function, which provides support to the operational entities on by the Global Business Units with regard to organisation and legislation and during tax audits. It also monitors tax consolidation appointments, or relating to bids, projects and centres of excellence of within the Group and ensures their overall coherence; any kind in their territories. They are responsible for HR development • a risk and prevention insurance function, which manages all insurance and the optimisation of industrial resources. They are also responsible policies taken out by the Group to guarantee all of its companies, for Thales’s institutional relations as well as for communication. optimises the costs of these policies, verifies that the companies are The country manager of each of the six major industrial countries properly covered against insurable risks that they incur and issues (excluding France) in which the Group operates (see list above) reports recommendations to prevent them. It also monitors any significant claims; to a Non- Executive Chairman, appointed from among the Group’s • a treasury and financing function, which optimises financial resources senior executives. The Non-Executive Chairman acts an interface and manages the Group’s financial risks (foreign exchange, interest between the country and head office and liaises between the Country rates, pensions, etc.); Manager and Executive Committee. • a financial engineering function, in support of commercial contracts For the other countries in Europe (apart from those with a Non-Executive to offer customers suitable financing, secure payments to be Chairman, see above), the country or regional Manager reports to the received and hedge against the financial consequences of contract Europe and International Operations department, which in turn reports interruption which could arise in particular in the event of political to the Senior Executive Vice President, Operations & Performance. risk or risk of customer default. In all other regions (Africa, Latin America, Asia and the Middle East), The Group’s Finance department is represented in each Global the country or regional manager reports to the Senior Executive Vice Business Unit, each operational entity and each of the main countries President, International Development. by a Finance Director who functionally reports to it. The implementation The Group defines common processes and internal rules on delegation of the accounting and financial internal control is carried out by these setting out the way in which responsibility is shared, provides entities Finance Directors, who have local teams within their scope of with the corresponding tools and sets up umbrella departments. responsibility to ensure that the financial information is prepared in compliance with the rules on internal control. The delegations are implemented in legal entities coordinated at national level. At the time of the annual and half-year financial statements, the Chief Executive Officers and the Finance Directors issue a letter of The Group’s managing bodies representation to the Group’s Finance department, certifying the fair presentation and completeness of the financial data submitted for These consist of Global Business Units, countries and functional consolidation. departments and are ultimately responsible for the Group’s entire internal control system, relying in particular on internal processes and Legal function the work of the Risk Management Committee and the Risk Assessment Committee. The Group’s Legal & Contracts Department, as well as the legal counsel in the various countries and Global Business Units, provide support to The Group’s governance is founded on the key principle of the the operational entities with regard to local and international laws, in responsibility of the directors of operational entities, who are order to manage any potential legal risks that may be incurred in the responsible for establishing and maintaining the risk management and various fields of the law. internal control system within their operational entities.

2017 Registration Document — THALES 29 2017 Financial Information — Management report

The Group’s Human Resources department also has a network of legal Chorus 2.0 is a vital tool to enable each entity to have its management advisors who specialise in employment law and who provide support systems certified – on a Group wide platform – in terms of quality, to the Group’s entities. The Legal & Contracts Department and health, safety and environment and with regard to the norms and the Human Resources Department call upon outside law firms, where standards applicable to each business activity. necessary. Chorus 2.0 is a crucial element of the Group’s internal control and is a natural component of the reference systems used in the work of the Operations and performance function Audit, Risks & Internal Control Department. The Operations and Performance department is responsible for the operational resources necessary to carry out projects and ensure Rules of procedure of the Board of Directors customer satisfaction and quality, thus contributing to risk management. Section 3.2.1 provides more details on the Board of Directors, its rules of It approves the most sensitive bids according to specific criteria and procedure and its operation. holds quarterly reviews of projects deemed critical. It manages skills development plans as well as bid and project manager certification Codes and guides of conduct plans. It rolls out and upgrades bid costing and project management tools and provides ad hoc support to any Global Business Units and The code of Conduct defines the types of conduct that are prohibited as countries requesting it. In each entity, the Director of Operations they may be construed as acts of corruption or influence peddling. The coordinates, in close collaboration with the Legal Director and the Code applies to all employees of the Group. It has been incorporated Finance Director, the management of all of the Company’s risks. into the internal regulations of the Group’s French companies and is in the process of being rolled out to its foreign subsidiaries. The Operations and Performance department includes the Quality Assurance and Customer Satisfaction Department, which defines the It is supplemented by the Code of Ethics and a set of guides published quality assurance policy and objectives and drives improvements in in the Group’s framework. customer satisfaction. It steers the process management framework The Code of Ethics, published in eight languages, is the bedrock of (Chorus 2.0) applicable to all Group entities. Each process is entrusted Thales’s culture of integrity. It sets out the rules of conduct and the values to a manager who is responsible for defining rules and setting targets, that the Group wants to develop. It covers relationships with customers as well as for implementing them and making sure that they are and suppliers, partners, employees, shareholders and financial markets, effective. This translates into process targets being achieved while as well as protection of the environment. reducing risk. Quality assurance procedures for offers, projects and products are carried out by the operational entities, in order to A business ethics reference guide is dedicated to the prevention of effectively meet customer demands and ensure customer satisfaction corruption. It describes the rules and regulations that must be respected and secure the execution of operations. internally. In addition, the Quality Assurance and Customer Satisfaction function Several business ethics conduct guides present the best practices manages the policy in place for assessing the maturity of operational expected from employees with regard to anti- corruption measures, gifts entities (see description in Section 1.1.3.4- a). and hospitality, conflicts of interest, lobbying and the use of the professional whistleblowing system. b) The Group’s operating principles and procedures A reference guide entitled “Compliance with Export Control Regulations” Thales’s operating principles and procedures underpin the Group’s describes the compliance requirements and the process of export internal control. This set of organisational rules, policies and control. It identifies stakeholders, defines their responsibilities, and sets procedures, which includes rules on ethical conduct and corporate out best practices in terms of compliance with export control regulations. responsibility, is available on the Group intranet and is provided to all As part of its policy of preventing insider trading, the Group has new employees in their welcome pack. adopted a Code on Insider Trading for directors, and regularly updates the list of insiders (see Section 3.2.1). Reference system An e- learning platform also helps to educate the Group’s employees on Thales has created a process- based reference system called Chorus topics such as export controls, ethics and corporate responsibility. 2.0, which defines the organisation, rules, practices and methods to be implemented at each Group entity. c) Group risk mapping Thanks to its modular design, it can be adapted to the business context The Group has mapped its major operational, strategic, compliance and can be augmented within each entity or country, by local rules and and financial risks. It updates this risk map each year. practices detailed in a technical reference system. Each risk factor identified is set out in risk scenarios prioritised on the Chorus 2.0 is accessible via the intranet, making it easy to locate the basis of two analysis criteria, before and after mitigation: likelihood of policies, procedures, instructions, templates and forms which need to occurrence and financial impact. be used. Chorus 2.0 covers nine headline processes, sub-divided into 26 processes. These processes, which are closely interfaced – and The Group has assigned each of these risks to a risk advisor who is identify activities that require attention with regard to the potential for responsible for coordinating the management of this risk under the risks to occur – precisely define how Thales works according to the supervision of the Risk Assessment Committee. This consists of roles, rules, practices and operating modes described. characterising the risk, monitoring major incidents, overseeing the deployment of the risk management system and continuously improving it. This reference system gives all Group companies a shared language and a unified management process. Chorus 2.0 is also aimed at organisational alignment across the Group.

30 THALES — 2017 Registration Document Management report — 2017 Financial Information

1.1.3.3 Principal corporate risks the coverage and cost of insurance for the Group, checks that the entities are guaranteed against the insurable risks they incur, and issues and their management recommendations for their prevention. This Department also monitors any significant claims. The section on risk factors in the Group management report (see Section 1.1.2) describes the measures taken by the Group to address b) Development and processing of published financial operational, strategic, legal and compliance and financial risks and and accounting information risks related to insurance. Accounting and financial procedures a) Centralised activities The Group has several procedural manuals applicable in all entities Some complex or risky transactions are carried out solely by central and reiterated in the processes defined in Chorus 2.0. The Finance departments, which ensure the sharing, consistency and coordination of Directors of each entity are accountable to the Group Finance the Group’s practices. A specific internal control mechanism has been department for compliance with these procedures. put in place to manage the risks associated with these transactions. 1 Manual of accounting standards and policies Investments and divestments This manual provides a detailed description of the accounting standards Total or partial acquisitions and disposals come under the exclusive and policies to be applied during the preparation of the consolidated remit of the Group’s corporate management. The Global Business Units financial statements in accordance with IFRS. propose projects at periodic meetings of the Mergers and Acquisitions Committee, made up of the main central departments. Budgetary control manual Financing, treasury management and foreign exchange risk This manual describes the hierarchy and reporting levels required by the Group, the financial cycles, the responsibilities of the Finance The Group’s financial resources, liquidity risk and interest rate risk are department in operational processes and the rules to be followed by all managed centrally by the Group Treasury and Financing department. Group entities. Except in special cases, the Group’s subsidiaries are not authorised to undertake financing operations themselves. According to the policy of Reporting manual optimising and centralising the Group’s financial resources, the Group Treasury and Financing department provides funding to the subsidiaries, This manual describes the content and format of periodic reports and manages surplus cash positions in all of the Group’s currencies and contains a glossary to help standardise financial aggregates. matches surpluses with cash requirements. The Group Treasury and Financing department is also responsible for managing the Group’s Cash management manual currency position and hedging the associated risks (in particular the This manual describes the respective roles of central teams and teams foreign exchange risks to which the subsidiaries are exposed, which within each entity in respect of cash flow and financing operations. are closely monitored at the subsidiary level). Foreign currency transactions are analysed prior to any financial commitment and are It also details the procedures for short-term cash flow management, hedged against foreign exchange risk as soon as the likelihood of operation of the exchange risk hedging system and the related being awarded the sales contract and / or signing a purchase order reporting rules. becomes significant, excluding special cases. Internal control questionnaire Customer financing and hedging of contract interruption The internal control questionnaire and the accompanying instructions and credit risks provide an additional framework and help to improve the reliability of The International Financial Affairs department coordinates and financial reporting while at the same time preventing the risk of fraud. supervises the Group’s financial engineering activities (establishment of These elements, which have gradually been incorporated into the advance market commitments, customer financing (buyer or supplier process management framework and distributed to the entire Group, credit), documentary credits or more complex transactions such as are effectively equivalent to an internal financial control manual. project financing or PPP). These transactions are carried out in collaboration with those responsible for the financial engineering of Budget process international activities, who report to their Finance department and also There are three stages in setting the annual budgetary targets: to the International Financial Affairs department. • the Global Business Units draw up a strategic plan over a minimum Real estate management period of four years, which can be adjusted depending on their business models; this is then presented to and approved by Group All real estate transactions come under the exclusive remit of the Group’s corporate management; Real Estate Department. It may delegate certain operations, especially outside France, to a national organisation, or to a local company, while • each Global Business Unit, each major country, the Europe and ensuring proper supervision. International Operations Department and the International Development Department then present a detailed three- year budget Disputes, litigation and legal compliance plan to Group corporate management. This plan is based on the sales forecasts and assumptions prepared by the marketing and With the exception of disputes concerning relationships with employees sales departments, in accordance with the strategic plans prepared and trade unions, which are handled by the Human Resources by the Global Business Units; Department, other disputes are monitored by the Legal and Contracts Department. • finally, Group corporate management sets targets for the Global Business Units, the main countries, the Europe and International Insurance and prevention (of insurable risks) Operations department and the International department, ensuring that they are consistent overall. The first year of the plan is then All of the insurance policies taken out by the Group are managed by analysed monthly and is used as a reference for steering the Group. the Insurance and Prevention of Insurable Risks Department. It optimises

2017 Registration Document — THALES 31 2017 Financial Information — Management report

Financial reporting • EASA Part 147 for aeronautical training and maintenance; • ISO 14001 and OHSAS 18001 for Environment, Health & Safety at The system includes some of the key factors described earlier in this work. report, such as accounting and financial procedures and a centralised consolidation process supported by a single tool. b) Self-assessment and ongoing improvement Monthly results are analysed in order to identify any budget deviations of corporate risk management and to update annual forecasts for orders, sales, profits and cash flow. Since 2007, the Group has had a corporate risk management process This procedure is carried out by each entity and provides a in place for all the businesses and subsidiaries it controls. consolidated view at Global Business Unit and Group level. It also makes it possible to identify any action plans necessary to achieve the In 2017, the Group’s risk mapping process identified and measured the objectives set. potential frequency and impact of 56 risk scenarios, with operational responsibility for each being specifically allocated to one of the following Consolidation of the financial statements three management structures: The teams in charge of consolidation ensure that changes in regulations • local entities, segments or Country Business Units; and standards are taken into account. They use the same consolidation • Global Business Units or Business Lines; software throughout the Group, selected from those available on the • central functions. market, which enables it to upload the accounting information from the The processes defined in Chorus 2.0, the insurance policy, the Group’s various entities with consistency checks carried out at source. self-assessment and internal control tools, and the internal and external Transfers of accounting entries to head office are authorised only after audits form part of the management of these risks. validation. Training sessions and personalised support on the tool within the Group’s consolidation teams ensure that users operate the software Every year, the local entities report on the risk scenarios under their effectively. responsibility, in the form of a questionnaire (yearly attestation letter), updated annually and completed by the heads of the operational entities and their management teams. In 2017, 110 questionnaires were 1.1.3.4 Ongoing improvement completed by the Group’s operational entities. The responses to these questionnaires are analysed by the Audit, Risks & Internal Control process Department, and by the network of risk advisors. A sample of questionnaires are checked for accuracy and compliance by the Audit, Thales has introduced internal and external assessments, based on Risks & Internal Control Department: in 2017, 15 questionnaires were international standards, enabling the Group to identify any areas subject to an internal audit. requiring continuous improvement, to prioritise these and to monitor the associated action plans. c) Self-assessment and ongoing improvement of internal financial control a) Assessment of the maturity of operational entities Drawing in particular on the AMF recommendation entitled “Reference Thales has developed an internal system for assessing the maturity of framework for risk management and internal control systems” and in its operational entities, known as the Thales Integrated Maturity System. collaboration with its statutory auditors, the Group asks its financial It is used for: community to complete an internal control questionnaire (ICQ) focusing • bid, project and product management; on the reliability of financial processes and the prevention of fraud. development, production, facilities and deployment; • The ICQ is based on internal control objectives linked to the Group’s purchasing, quality, support activities and services. • processes and accounting cycles (customers/ suppliers /fixed assets, etc.) An assessment may cover an entire organisation or be restricted to a and is designed to enable the entities to identify areas of improvement, specific element of said organisation, such as a project or product. whether these are due to control objectives that have not yet been Whatever the scope, the system considers three components: completely achieved, insufficient control in practice, or procedures that organisation and management, resources and skills, and processes, need to be improved. In 2017, 132 questionnaires were completed, practices and tools. representing all of the operational entities plus the shared services. Maturity assessments are performed by experienced assessors who are recognised in their field as well as by the quality managers at each operational entity. 1.1.3.5 Oversight of the internal The maturity model covers all of the Chorus 2.0 management system control and risk processes and is fully compliant with international standards, such as: management system • the international CMMI® (Capability Maturity Model Integration) model, which is recognised by many customers for its development, a) Monitoring and control bodies acquisition and services models; The Board of Directors exercises control over the management of the the international Supply Chain Operations Reference (SCOR®) model. • Group, either directly or through its committees. Detailed information on the organisation of the Board’s work and, more generally, the Process management performance of the Board and its committees is given in Section 3.2.1 Thales has obtained and maintains, in its different activities, certifications of the corporate governance report. of compliance with applicable standards and regulations that attest to its ability to manage its processes to meet the needs of its customers. Audit and Accounts Committee For quality and for all Group activities, the certification standard is ISO At the meetings of this committee to the Board of Directors, the 9001, and, depending on the business activities, the following resources employed, actions taken to improve internal control and risk standards are also used (non- exhaustive list): identification and management are reviewed. In 2017, this committee met six times. • AQAP 2110, NATO quality standard for the defence sector; • EN 9100, European standard describing a quality assurance Each year, the Audit, Risks & Internal Control Department submits an system for the Aerospace industry; audit plan to the Audit and Accounts Committee covering various • EASA Part 21 subpart G for production activities (Europe); aspects relating to the Group in respect of compliance with legislation • EASA Part 145 (Europe) and FAR 145 (USA) for maintenance activities; and regulations, assessment of internal control and risk identification and management.

32 THALES — 2017 Registration Document Management report — 2017 Financial Information

At the time of the annual closing of the accounts, the Senior Executive Group Internal Audit, Risks & Internal Control Department Vice President, Finance and Information Systems presents a report on Reporting to the Group General Secretary, the Audit, Risks & Internal risk exposure and significant off-balance sheet commitments to the Audit Control Department principally works with the Audit and Accounts and Accounts Committee. Committee, the Risk Management Committee, the Risk Assessment Committees, Group corporate management and the statutory auditors. Risk Management Committee It ensures proper risk management and the maintenance of adequate This committee, chaired by the Chairman and CEO, is responsible for internal control by conducting audits or providing guidance. It may have defining the level of risk deemed acceptable by the Group, allocating involvement throughout the Group (Thales parent company and its risk management and control responsibilities for these risks, defining the controlled subsidiaries) as well as with its non-controlled subsidiaries, strategy for transferring certain risks to insurance, approving the Group’s with the agreement of the co-owner companies. Its scope of involvement risk mapping, and more generally, ensuring that the risk assessment and covers all areas and processes (governance, administrative, accounting management system is as comprehensive as possible in order to and financial, functional and operational, etc.). maximise risk mitigation. It is supported by the work of the Risk Assessment 1 Committee. In 2017, this committee met once. Since 2006, the Audit, Risks & Internal Control Department has been certified by IFACI (1), which ensures that its practices comply with the Risk Assessment Committee international auditing standards. The last IIA/ IFACI triennial certification was obtained by the Audit, Risks & Internal Control Department in This committee is chaired by the Senior Vice President, Audit, March 2016. The annual progress visit made by IFACI in March 2017 Risks & Internal Control. It is responsible for analysing risks and evolving confirmed the Department’s capacity and that of its auditors to threats; it updates and prioritises risk scenarios, ensuring that coordinate their activities and operate in accordance with the responsibility for each risk scenario is allocated within the Group, prerequisites and the core principles of the internal audit profession. prepares risk maps and formulates recommendations for the Risk Management Committee, with a view to improving the overall The actions of the Audit, Risks & Internal Control Department are management and mitigation of Group risks. In 2017, the Risk Assessment governed by an Internal Audit charter (updated in June 2016) that Committee met five times. defines the basic principles of internal control and internal audit, the scope and limits of its responsibilities and its interaction with the entities. Ethics and Corporate Responsibility Committee In 2017, 63 audits or advisory engagements, arising from the Group’s This committee, chaired by the Company Secretary, is composed of risk analysis and planned according to the criteria set out and representatives of the functional departments and the main countries in approved by the Audit and Accounts Committee, were conducted by which the Group is based. Its work is focused on three areas: teams from the Audit, Risks & Internal Control Department. These engagements focused on the following themes: • Strategy: – contribute to the definition of Thales’s policy on Ethics and Corporate • Operations: bids and projects, product policy, engineering and Responsibility, industry; – identifying and making recommendations with regard to the • Compliance: ethics, export control, security of information systems, standards and procedures concerning sales, environmental, business continuity plans; human- resource- related and social issues; • Governance: organisation, shared services, joint ventures, monitoring of acquisition and divestment transactions; Ownership: • Internal control: auditing the accuracy of risk management and – ensuring that the internal Codes are kept up to date and implemented • internal control questionnaires (yearly attestation letter, internal within Thales, control questionnaire). – defining training objectives and suitable means of communication, – coordinating and monitoring the Country Ethics Committees and b) Audit of financial information ethics officers; Each year, the Finance department reviews the financial audit manual Sharing: • with the statutory auditors. This manual describes the phases for the use – holding discussions amongst its members on good practices, of external auditors. experiences and the ethical issues submitted to it. Consolidated companies are placed in one of three categories, In 2017, this committee met three times. according to their size and the risks to which they may be exposed. The Ethics and Corporate Responsibility department is responsible for They may be subject to an in- depth review, a limited review or a the Group’s actions in terms of ethics and responsibility, coordinating review for statutory requirements. the relevant people within the Group, and ensuring that the ethical In the first two types of review, as well as assessing the financial issues submitted to it are handled and followed up correctly, through an statements, the statutory auditors recommend improvements in terms of ad hoc committee where necessary. internal control. These recommendations are presented to Group management as part of the closure of the accounts at 31 December.

1.1.4 Human resources, environmental and social information Table of reconciliation (Articles L. 225-102- 1 and R. 225-105- 1 of the French Commercial Code)

In accordance with the Articles L. 225-102- 1 and R. 225- 105-1 of the issues. This information is set out in full in Chapter 5 “Corporate French Commercial Code on transparency obligations for companies on responsibility”; an independent third- party verifier has issued a statement social and environmental matters, in its management report, Thales of completeness and limited assurance report on the consolidated social, provides information on the Group’s social, environmental and societal environmental and societal information (see pages 199 et seq.).

(1) Institut Français de l’Audit et du Contrôle Interne (French Institute of Audit and Internal Control).

2017 Registration Document — THALES 33 2017 Financial Information — Management report

1.1.5 Events since year- end

Thales and Gemalto announced, with the publication of the Offer Document on 27 March 2018, that Thales is launching its recommended all-cash offer to all holders of issued and outstanding shares in the capital of Gemalto for EUR 51.00 per share, cum dividend.

1.1.6 Summary statement of transactions referred to in Article L. 621-18- 2 of the French Monetary and Financial Code carried out in 2017

Details of the transactions carried out are set out in Section 4.2.3.7.

34 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

1.2 CONSOLIDATED FINANCIAL STATEMENTS

1.2.1 Consolidated profit and loss account

(in € millions) Notes 2017 2016

Sales Note 2 15,795.4 14,884.8 Cost of sales (a) (11,951.2) (11,276.8) 1 Research and development expenses (802.2) (736.1) Marketing and selling expenses (a) (1,040.6) (1,023.2) General and administrative expenses (549.5) (543.5) Restructuring costs Note 10.2 (81.1) (100.5) Amortisation of intangible assets acquired (PPA) (b) Note 4.2 (113.0) (107.3) Income from operations Note 2 1,257.8 1,097.4 Disposal of assets, changes in scope of consolidation and other Note 3.2 (81.5) 205.1 Impairment on non- current assets – – Income of operating activities before share in net income of equity affiliates 1,176.3 1,302.5 Share in net income of equity affiliates 134.8 119.6 • of which, share in net income of joint ventures Note 5.1 88.5 72.4 • of which, share in net income of associates Note 5.2 46.3 47.2 Income of operating activities after share in net income of equity affiliates 1,311.1 1,422.1 Interest expense on gross debt (16.3) (11.3) Interest income on cash and cash equivalents 21.3 17.6 Interest income, net Note 6.1 5.0 6.3 Other financial income (expenses) Note 6.1 (99.3) (80.6) Finance costs on pensions and other employee benefits Note 9.3 (65.5) (77.6) Income tax Note 7.1 (264.2) (255.6) NET INCOME 887.1 1,014.6 Attributable to: Shareholders of the parent company 821.7 946.4 Non- controlling interests 65.4 68.2

Basic earnings per share (in euros) Note 8.2 3.88 4.49

Diluted earnings per share (in euros) Note 8.2 3.85 4.44

(a) The depreciation of net costs related to customer accounts was reclassified from marketing and selling expenses to cost of sales (a negative amount of €2.2 million in 2016). (b) This item corresponds to the amortisation of acquired intangible assets (Purchase Price Allocation: PPA) of fully consolidated entities. The amortisation of PPA related to equity affiliates is included in the share in net income of equity affiliates and detailed in Note 2.1.

2017 Registration Document — THALES 35 2017 Financial Information — Consolidated financial statements

1.2.2 Consolidated statement of comprehensive income

(in € millions) 2017 2016

Total attributable to: Total attributable to:

shareholders non-controlling shareholders non-controlling of the parent interests of the parent interests company Total company Total

NET INCOME 821.7 65.4 887.1 946.4 68.2 1,014.6 Translation adjustment: subsidiaries (Note 8.1) (88.5) (1.9) (90.4) 32.2 (0.3) 31.9 Deferred tax (Note 7.2) – – – 1.3 – 1.3 Joint ventures (Note 5.1) (7.9) – (7.9) (26.9) – (26.9) Associates (Note 5.2) (17.5) – (17.5) (30.7) – (30.7) Net (113.9) (1.9) (115.8) (24.1) (0.3) (24.4) Cash flow hedge: subsidiaries (Note 8.1) 384.2 17.2 401.4 49.5 3.0 52.5 Deferred tax (Note 7.2) (107.5) (5.5) (113.0) (17.4) (1.5) (18.9) Joint ventures (Note 5.1) (3.5) – (3.5) (0.5) – (0.5) Associates (Note 5.2) (2.3) – (2.3) 0.5 – 0.5 Net 270.9 11.7 282.6 32.1 1.5 33.6 Available for sale financial assets: subsidiaries (1.0) – (1.0) 3.5 – 3.5 Joint ventures (Note 5.1) (6.7) – (6.7) 6.7 – 6.7 Net (7.7) – (7.7) 10.2 – 10.2 Items that may be reclassified to income 149.3 9.8 159.1 18.2 1.2 19.4 Actuarial gains (losses) on pensions: subsidiaries (Note 9.3) 52.8 (3.4) 49.4 (658.1) (2.9) (661.0) Deferred tax (Note 7.2) 2.9 0.3 3.2 22.6 (0.3) 22.3 Joint ventures (Note 5.1) 1.9 – 1.9 (12.7) – (12.7) Associates (Note 5.2) (0.7) – (0.7) 0.4 – 0.4 Items that will not be reclassified to income 56.9 (3.1) 53.8 (647.8) (3.2) (651.0) Other comprehensive income (loss) for the year, net of tax 206.2 6.7 212.9 (629.6) (2.0) (631.6) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,027.9 72.1 1,100.0 316.8 66.2 383.0

36 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

1.2.3 Consolidated statement of changes in equity

(in € millions) Number Share Additional Retained Cash flow AFS Cumulative Treasury Total Non- Total of shares capital paid-in earnings hedge invest- translation shares attributable controlling equity outstanding capital ments adjustment to interests (thousands) shareholders of the parent company

AT 1 JANUARY 2016 210,122 632.9 3,995.4 404.6 (276.8) 2.2 (87.2) (25.2) 4,645.9 295.9 4,941.8 Net income – – – 946.4 – – – – 946.4 68.2 1,014.6 Other comprehensive income – – – (647.8) 32.1 10.2 (24.1) – (629.6) (2.0) (631.6) 1 Total comprehensive income for 2016 – – – 298.6 32.1 10.2 (24.1) – 316.8 66.2 383.0 Employee share issues 1,233 3.7 41.5 – – – – – 45.2 – 45.2 Parent company dividend distribution (Note 8.1) – – – (296.8) – – – – (296.8) – (296.8) Third- party share in dividend distribution of subsidiaries – – – – – – – – – (48.3) (48.3) Share- based payments (Note 9.4) – – – 16.7 – – – – 16.7 – 16.7 Acquisitions / disposals of treasury shares (Note 8.1) 90 – – (13.8) – – – (36.4) (50.2) – (50.2) Purchase of Raytheon stake in TRS SAS – – – (52.8) – – – – (52.8) (85.8) (138.6) Other – – – 12.2 (5.8) – – – 6.4 (0.6) 5.8 Changes in scope of consolidation – – – 7.8 (0.2) – 1.3 – 8.9 (1.5) 7.4 AT 31 DECEMBER 2016 211,445 636.6 4,036.9 376.5 (250.7) 12.4 (110.0) (61.6) 4,640.1 225.9 4,866.0 Net income – – – 821.7 – – – – 821.7 65.4 887.1 Other comprehensive income – – – 56.9 270.9 (7.7) (113.9) – 206.2 6.7 212.9 Total comprehensive income for 2017 – – – 878.6 270.9 (7.7) (113.9) – 1,027.9 72.1 1,100.0 Employee share issues 464 1.4 16.3 – – – – – 17.7 – 17.7 Parent company dividend distribution (Note 8.1) – – – (348.9) – – – – (348.9) – (348.9) Third-party share in dividend distribution of subsidiaries – – – – – – – – – (68.1) (68.1) Share- based payments (Note 9.4) – – – 21.8 – – – – 21.8 – 21.8 Acquisitions/ disposals of treasury shares (Note 8.1) 181 – – (65.4) – – – 9.1 (56.3) – (56.3) Other – – – 23.4 – – 0.2 – 23.6 (0.3) 23.3 Changes in scope of consolidation – – – – – – – – – – – AT 31 DECEMBER 2017 212,090 638.0 4,053.2 886.0 20.2 4.7 (223.7) (52.5) 5,325.9 229.6 5,555.5

2017 Registration Document — THALES 37 2017 Financial Information — Consolidated financial statements

1.2.4 Consolidated balance sheet

Assets

(in € millions) Notes 31 / 12/ 2017 31 / 12 / 2016

Goodwill, net Note 4.1 3,447.2 3,424.4 Other intangible assets, net Note 4.2 877.5 958.8 Property, plant and equipment, net Note 4.2 1,819.1 1,798.9 Total non-current operating assets 6,143.8 6,182.1 Investments in joint ventures Note 5.1 1,027.8 997.5 Investments in associates Note 5.2 210.1 219.5 Non- consolidated investments Note 6.3 87.7 82.3 Other non- current financial assets Note 6.3 166.5 138.3 Total non-current financial assets 1,492.1 1,437.6 Non- current derivatives – assets Note 6.5 17.0 27.9 Deferred tax assets Note 7.3 858.1 975.8 NON-CURRENT ASSETS 8,511.0 8,623.4 Inventories and work in progress Note 10.1 2,803.4 2,734.6 Construction contracts: assets Note 10.1 2,306.0 2,331.5 Advances to suppliers Note 10.1 451.8 348.3 Accounts, notes and other current receivables Note 10.1 4,351.1 4,547.5 Current derivatives – assets Note 6.5 254.4 161.7 Total current operating assets 10,166.7 10,123.6 Current tax receivable 36.6 59.8 Current financial assets Note 6.2 332.0 265.9 Current derivatives – assets Note 6.5 3.1 – Cash and cash equivalents Note 6.2 4,282.7 3,616.9 Total current financial assets 4,617.8 3,882.8 CURRENT ASSETS 14,821.1 14,066.2 TOTAL ASSETS 23,332.1 22,689.6

38 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Equity and liabilities

(in € millions) Notes 31 / 12/ 2017 31 / 12 / 2016

Capital, additional paid- in capital and other reserves 5,602.1 4,811.7 Cumulative translation adjustment (223.7) (110.0) Treasury shares (52.5) (61.6) Total attributable to shareholders of the parent company 5,325.9 4,640.1 1 Non- controlling interests 229.6 225.9 TOTAL EQUITY Note 8.1 5,555.5 4,866.0 Long- term loans and borrowings Note 6.2 953.5 1,433.7 Non- current derivatives- liabilities Note 6.5 2.6 – Pensions and other long- term employee benefits Note 9.3 2,674.3 2,785.8 Deferred tax liabilities Note 7.3 237.6 294.6 NON-CURRENT LIABILITIES 3,868.0 4,514.1 Advances received from customers on contracts Note 10.1 4,162.6 4,478.4 Refundable grants Note 10.1 127.7 133.4 Construction contracts: liabilities Note 10.1 1,278.3 1,139.4 Reserves for contingencies Note 10.2 1,134.7 1,037.0 Accounts, notes and other current payables Note 10.1 6,264.3 5,872.6 Current derivatives – liabilities Note 6.5 179.7 478.3 Total current operating liabilities 13,147.3 13,139.1 Current tax payable 54.0 59.0 Short- term loans and borrowings Note 6.2 707.3 111.4 CURRENT LIABILITIES 13,908.6 13,309.5 TOTAL EQUITY AND LIABILITIES 23,332.1 22,689.6

2017 Registration Document — THALES 39 2017 Financial Information — Consolidated financial statements

1.2.5 Consolidated statement of cash flows

(in € millions) Notes 2017 2016

Net income 887.1 1,014.6

Add (deduct): Income tax expense (gain) 264.2 255.6 Net interest income (5.0) (6.3) Share in net income of equity affiliates (134.8) (119.6) Dividends received from equity accounted: joint ventures 38.5 43.6 Dividends received from equity accounted: associates 40.8 29.1 Depreciation and amortisation of property, plant and equipment and intangible assets Note 4.2 391.1 384.6 Depreciation and amortisation of intangible assets acquired Note 4.2 113.0 107.3 Provisions for pensions and other employee benefits Note 9.3 191.7 170.5 Loss (gain) on disposal of assets, and other Note 3.2 81.5 (205.1) Provisions for restructuring, net Note 10.2 (27.0) (7.4) Other items (65.1) 31.4 Operating cash flows before working capital changes, interest and tax 1,776.0 1,698.3 Change in working capital and reserves for contingencies Note 10.1 222.5 (63.4) Cash contributions to pension plans and other long- term employee benefits Note 9.3 (202.9) (190.1) • UK deficit payment (82.3) (88.3) • recurring contributions / benefits (120.6) (101.8) Interest paid (14.0) (21.1) Interest received 22.3 13.6 Income tax paid (90.6) (99.4) NET CASH FLOW FROM OPERATING ACTIVITIES - I - 1,713.3 1,337.9 Acquisitions of property, plant and equipment and intangible assets (438.9) (480.3) Disposals of property, plant and equipment and intangible assets 8.2 8.3 Net operating investments (430.7) (472.0) Acquisitions of subsidiaries and affiliates, net Note 6.4 (121.4) (391.2) Disposals of subsidiaries and affiliates, net Note 6.4 41.9 296.9 Decrease (increase) in loans and non- current financial assets (26.7) (26.5) Decrease (increase) in current financial assets (70.8) (235.6) Net financial investments (177.0) (356.4) NET CASH FLOW USED IN INVESTING ACTIVITIES - II - (607.7) (828.4) Parent company dividend distribution (348.9) (296.8) Third party share in dividend distribution of subsidiaries (68.1) (48.3) Capital increase (options exercised) 18.0 45.7 Purchase / sale of treasury shares (56.3) (40.8) Issuance of debt 107.0 641.1 Repayment of debt (32.9) (643.7) Net financial debts 74.1 (2.6) NET CASH FLOW USED IN FINANCING ACTIVITIES - III - (381.2) (342.8) Effect of exchange rate variations and other - IV - (58.6) – INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS I + II + III + IV 665.8 166.7 Cash and cash equivalents at beginning of period 3,616.9 3,450.2 CASH AND CASH EQUIVALENTS AT END OF PERIOD 4,282.7 3,616.9

The Group’s net cash position and the changes from one period to the next are presented in Note 6.2.

40 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

1.2.6 Notes to the consolidated financial statements

NOTE 1 ACCOUNTING STANDARDS FRAMEWORK 42

NOTE 2 SEGMENT INFORMATION 45

NOTE 3 IMPACT OF CHANGES IN SCOPE OF CONSOLIDATION 47 NOTE 4 PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 48 1 NOTE 5 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES 50

NOTE 6 FINANCING AND FINANCIAL INSTRUMENTS 52

NOTE 7 INCOME TAX 60

NOTE 8 EQUITY AND EARNINGS PER SHARE 63

NOTE 9 EMPLOYEE BENEFITS 66

NOTE 10 CURRENT OPERATING ASSETS AND LIABILITIES 71

NOTE 11 LITIGATION 74

NOTE 12 SUBSEQUENT EVENTS 74

NOTE 13 ACCOUNTING POLICIES 75

NOTE 14 FEES PAID TO STATUTORY AUDITORS 79

NOTE 15 OTHER DISCLOSURES 79

NOTE 16 LIST OF MAIN CONSOLIDATED COMPANIES 79

All monetary amounts included in these notes are expressed in millions of euros.

2017 Registration Document — THALES 41 2017 Financial Information — Consolidated financial statements

NOTE 1. ACCOUNTING STANDARDS FRAMEWORK

Thales’s consolidated financial statements for the year ended Thales (parent company) is a French joint- stock company (société 31 December 2017 were approved and authorised for issue by its anonyme) registered with the Nanterre Trade and Companies’ Register Board of Directors on 5 March 2018. In accordance with French under number 552 059 024. legislation, the financial statements will be deemed to be definitive once they have been adopted by the shareholders of the Group at the Annual General Meeting to be held on 23 May 2018.

1.1 Basis of preparation for the 2017 consolidated financial statements

Thales’s consolidated financial statements have been prepared in These accounting policies, described in Note 13, are consistent with accordance with the International Financial Reporting Standards (IFRS) those applied by the Group for the year ended 31 December 2016. approved by the European Union at 31 December 2017 (1). Furthermore, the new standards that were mandatory from 1 January 2017 (Amendements to IAS 12 – Income tax and Annual Improvements Cycle 2013-2016) have no impact on the Group’s financial statements. The reconciliation for the changes in financial debts of balance sheet,and cash flow from financial activities as required in the amendments to IAS 7 (Cash Flow statement), is provided in Note 6.2- c.

1.2 New standards effective from 31 december 2017

The following standards have been adopted by the IASB and will be effective for the periods indicated below pending their adoption by the European Union:

Accounting standard Description First-time EU application endorsement

IFRS 15 Supersedes standards IAS 18 (Revenue) and IAS 11 1 January 2018 Yes (Revenue from Contracts with Customers) (Construction contracts) and the related interpretations IFRS 9 Supersedes all existing standards related to Financial instruments 1 January 2018 Yes (Financial Instruments) IFRS 16 Supersedes IAS 17. Removes the distinction between operating 1 January 2019 Yes (Leases) leases and finance leases, all contracts now being recognised on the balance sheet IFRIC 22 Clarifies the accounting for transactions that include the receipt 1 January 2018 In progress (Foreign Currency Transactions or payment of advance consideration in a foreign currency and Advance Consideration) IFRIC 23 Refers to the recognition and measurement of financial risks 1 January 2019 In progress (Uncertainty over Income Tax Treatments) related to income tax expense IFRS 2 amendments Provides a narrow- scope amendment for the classification 1 January 2018 In progress (Share- based Payments) and measurement of share- based payment transactions IAS 28 amendments Clarifies the rules applicable (particularly as regards depreciation 1 January 2019 In progress (Long- term interests in associates and amortisation) to long- term investments in an associate and Joint Ventures)

(1) Available from: https://ec.europa.eu / info / law / international- accounting- standards- regulation- ec- no- 1606- 2002_en.

42 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Implementation of IFRS 15 The Group continued to work on the implementation of IFRS 15, which impact of applying the new standard. The opening balance sheet at became mandatory as of 1 January 2018. 1 January 2017 will be presented, as adjusted. Thales has opted for the full retrospective approach; the financial In this context, the Group has estimated the impact of the new standard statements for the first half of 2018 and for the full year 2018 will on the key indicators for 2017: include the 2017 comparative financial statements adjusted for the

Group’s key indicators 2017 Expected 2017 Reported impacts Restated for IFRS 15 IFRS 15 Oder backlog 31,914.2 150.0 32,064.2 1 Order intake 14,919.6 11.6 14,931.2 Sales 15,795.4 (567.9) 15,227.5 Income from operations 1,257.8 (162.3) 1,095.5 Share in net income of equity affiliates 134.8 (14.9) 119.9 Net income, attribuable to shareholders of the parent company 821.7 (141.9) 679.8

Segment information 2017 Expected 2017 Reported impacts Restated for IFRS 15 IFRS 15 Aerospace Sales 5,985.2 (237.9) 5,747.3 EBIT 601.5 (34.5) 567.0

Transport Sales 1,760.9 (37.6) 1,723.3 EBIT 71.6 (15.0) 56.6

Defence & Security Sales 7,983.2 (293.5) 7,689.7 EBIT 868.5 (111.9) 756.6

Other Sales 66.1 1.1 67.2 EBIT 1.0 (15.8) (14.8)

Thales Sales 15,795.4 (567.9) 15,227.5 EBIT 1,542.6 (177.2) 1,365.4

The main sources of differences between the current rules and IFRS 15 are IFRS 15 now provides for criteria proving the transfer of control over the following: goods and services to the customer over time and allowing for the recognition of revenue under the percentage of completion method. Order Backlog For complex sales of goods, it is necessary to demonstrate that the good IFRS 15 introduces the concept of accounting order backlog (“transaction sold has no alternative use and that the Group has an irrevocable right price allocated to the remaining performance obligation”). This to payment for the work performed to date (corresponding to the costs accounting definition compared to Thales current definition, does not incurred to date, plus a reasonable margin), in the event of termination lead to significant impact. for any reason other than Thales’s failure to perform. Detailed analysis of the Group’s contract portfolio has confirmed that, for the vast majority Unbundling of multiple performance obligations of contracts in progress, the criteria defined in IFRS 15 have been met. within a single contract In addition, as was the case before, revenue from services contracts will In certain situations, IFRS 15 requires the unbundling of multiple be recognised according to the percentage of completion method, with performance obligations within a single contract, with differentiated margin the customer receiving services as they are provided by Thales. rates. This is the case for some contracts combining construction and maintenance services, or construction and launch of a satellite. However, Percentage of completion method the impact of this restatement on the 2017 financial statements is limited. Currently, the revenue and margin of construction contracts are recognised as and when the technical milestones, which confirm effective progress Recognition of revenue under the percentage of a part of the works or completion of the services specified in the of completion method contract, are achieved. Under IFRS 15, the percentage of completion Under the current rules, revenue from construction contracts (representing method used is expense based: revenue is recognised based on costs over half the Group’s revenue) is recognised according to the percentage incurred to date in relation to all the costs expected upon completion. of completion method. For each contract, depending on the pace of performance and the

2017 Registration Document — THALES 43 2017 Financial Information — Consolidated financial statements

nature of the milestones achieved and costs incurred over the period, • changes in rules relating to hedge accounting (and especially the this change in method may cause shifts in revenue and margin treatment of the time value of options as a cost of hedging, which recognition from one period to another. limits net income volatily). This standard will come into effect on 1 January 2018. The review and Bid cost analysis of the text is still in progress, but the Group does not at this stage Bid cost which were previously included in contract costs, in accordance anticipate any material impact on its consolidated financial statements. with IAS 11, are now expensed as incurred as a line item under “marketing The Group is also reviewing the new IFRS 16 “Leases”, which is effective and selling expenses”. as from on 1 January 2019. This text, which replaces IAS 17 and the associated IFRIC and SIC interpretations, removes the distinction previously Other standards made between operating leases and finance leases. Under IFRS 16, a The assessment of the potential impacts of these new standards for the lessee recognises a right-of- use asset and a financial liability representative Group’s consolidated financial statements is underway. of the lease obligation. The right-of- use asset is amortised and the lease obligation is measured initially at the present value of the lease payments The new IFRS 9 on financial instruments introduces: over the lease term, discounted at the rate implicit in the lease if that can • a new classification of financial assets based on the Group’s be readily determined or at the incremental borrowing rate otherwise. management intention and the nature of expected flows; Work is under way to apply these new provisions, with most contracts a dynamic impairment model for financial assets on expected losses; • concerning property leases.

1.3 Translation

The principal exchange rates used to translate financial statements of entities with a functional currency different from the euro are as follows:

31 December 2017 31 December 2016 31 December 2015

Euro Closing rate Average rate Closing rate Average rate Closing rate Average rate

Australian Dollar 1.5346 1.4795 1.4596 1.4852 1.4897 1.4837 Pound Sterling 0.8872 0.8757 0.8562 0.8227 0.7340 0.7242 U.S. Dollar 1.1993 1.1370 1.0541 1.1032 1.0887 1.1046

1.4 Main sources of estimates Litigation (Note 11) The Group conducts its business in France and abroad in complex, The preparation of the Group’s consolidated financial statements evolving legal and regulatory environments. As a result, it is exposed to legal, involves making estimates and assumptions, which have an impact on technical and commercial disputes. the valuation of the Group’s performance and its consolidated assets The Group regularly identifies and reviews litigation in progress and and liabilities. These estimates are based on past experience and factor recognises the accounting provisions that it considers to be reasonable in the economic conditions prevailing at the end of the reporting period in light of the circumstances. Any uncertainties concerning litigation and any information available as of the date on which the financial in progress are described in Note 11. statements are prepared. Business combinations In today’s global economic environment, the degree of volatility and subsequent lack of visibility are particularly high. Future facts and circumstances Business combinations are accounted for in accordance with the purchase could lead to changes in these estimates or assumptions which would accounting method described in Note 13-b: on the date of the takeover of affect the Group’s financial situation, profit and loss and cash flows, notably a company, the acquiree’s identifiable assets, liabilities and contingent with regard to: liabilities are measured at their fair value. These valuations are performed by independent experts who base their work on assumptions and estimate Construction contracts (Note 10.1) the effects of future events, which are uncertain at the acquisition date. A significant part of the Group’s revenue and current operating income Goodwill (Note 4.1) stems from construction contracts recognised according to the technical percentage of completion method. These contracts often span several Goodwill is subject to impairment tests. The recoverable amount of goodwill financial years. In the accounting closing process, the recognition of is assessed based on forecast data from the strategic plans prepared income and expenses relating to these contracts depends mainly: in accordance with Group procedures. Sensitivity tests are carried out on key assumptions which lend greater weight to the conclusions reached. • on estimates of revenue and margin upon completion, including provisions for technical and commercial risks; Pensions and other long-term employee benefits (Note 9.3) • technical milestones achieved in the performance of these contracts. Pensions and other long- term employee benefit commitments are estimated on statistical and actuarial bases in accordance with the policies Estimates of figures upon completion, and the achievement of technical outlined in the Note 13-j. Actuarial assumptions made by the Group milestones, are based, for each contract, on the Group’s internal (discount rates, inflation rate, mortality tables, etc.) are reviewed each year systems and procedures, with the project managers playing a key role. with the Group’s actuaries. These estimates are reviewed regularly by the Operations department and the Finance department, under the supervision of the Group’s Deferred tax assets (Note 7) Corporate Management, particularly at each reporting period- end. Deferred tax assets are recognised for tax loss carryforwards and temporary differences between the book value and the tax value of assets and liabilities. Recovery of these assets is assessed on the basis of the forecast data in the strategic plans of each of the tax groups considered, and generally over a period of five years.

44 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

NOTE 2. SEGMENT INFORMATION

• the Defence and Security segment, which combines the “Secure 2.1 Information by Communications and Information Systems”, “Land and Air Systems” business segment and “Defence Mission Systems” Global Business Units that develop equipment, systems and services for the armed and security forces The operational segments presented by the Group are as follows: and for the protection of networks and infrastructures, mainly for a government / defence customer base. • the Aerospace segment, which combines the “Avionics” and “Space” Global Business Units that develop on-board systems, In order to monitor the operating and financial performance of the Group solutions and services, mainly for private sector customers (aircraft entities, the Group’s executives regularly consider certain key non-GAAP manufacturers, airlines, satellite operators, etc.) but also to a lesser indicators as defined in Note 13-a, which enable them to exclude certain extent for government/ defence customers (states, space agencies non- operating and non- recurring items. 1 and other semi- public organisations); In particular, EBIT, presented by business segment below, corresponds to • the Transport segment, which comprises the “Ground Transportation income from operations plus the share in net income of equity affiliates, Systems” Global Business Unit that develops systems and services excluding amortisation of acquisiton-related intangible assets (purchase for an exclusively civilian customer base of ground transportation price allocation – PPA) reported under business combinations. It also infrastructure operators; excludes other expenses booked to income from operations that are directly linked to business combinations, which are unusual by nature.

2017 Aerospace Transport Defence Other, elim., Thales & Security and unallocated (a)

Order backlog – non- Group 8,850.0 4,390.5 18,605.3 68.3 31,914.2 Order intake – non- Group 5,199.9 1,780.3 7,882.8 56.6 14,919.6 Sales – non- Group 5,985.2 1,760.9 7,983.2 66.1 15,795.4 Sales – intersegment 91.9 8.6 306.3 (406.8) – Total sales 6,077.1 1,769.5 8,289.5 (340.7) 15,795.4 EBIT 601.5 71.6 868.5 1.0 1,542.6 Of which, Naval Group – – – 47.9 47.9 Of which, excluding Naval Group 601.5 71.6 868.5 (46.9) 1,494.7 Capital expenditures 137.7 7.5 140.3 153.4 438.9 Dep. and amort. of property, plant and equipment and intangible assets 166.4 10.0 103.8 110.9 391.1

2016 Aerospace Transport Defence Other, elim., Thales & Security and unallocated (a)

Order backlog – non- Group 9,913.6 4,567.1 18,972.7 76.8 33,530.2 Order intake – non- Group 5,872.3 1,503.5 9,063.1 75.4 16,514.3 Sales – non- Group 5,812.0 1,602.8 7,390.2 79.8 14,884.8 Sales – intersegment 93.9 5.6 295.0 (394.5) – Total sales 5,905.9 1,608.4 7,685.2 (314.7) 14,884.8 EBIT 571.3 11.3 787.4 (15.5) 1,354.5 Of which, Naval Group – – – 33.8 33.8 Of which, excluding Naval Group 571.3 11.3 787.4 (49.3) 1,320.7 Capital expenditures 147.0 10.3 126.4 196.6 480.3 Dep. and amort. of property, plant and equipment and intangible assets 182.5 8.3 95.3 98.5 384.6

(a) Data related to order backlog, order intake and sales included in the “Other, elim and non- allocated” column relate to Corporate activities (Thales parent company, Thales Global Services, Group R&D centers, facilities management) and the elimination of transactions between the business segments.

Non-allocated EBIT includes the Group’s share (35%) in the net income of Naval Group (ex DCNS), corporate income from operations not assigned to the segments and the cost of vacant premises. Other costs (mainly the costs of foreign holding companies not invoiced and expenses related to share- based payments) are reallocated to the business segments proportionally to their respective sales (excluding Group).

2017 Registration Document — THALES 45 2017 Financial Information — Consolidated financial statements

The reconciliation between income from operations and EBIT is analysed as follow:

2017 2016

Income from operations 1,257.8 1,097.4 Share in net income of equity affiliates 134.8 119.6 Sub- total 1,392.6 1,217.0 PPA amortisation related to fully consolidated entities 113.0 107.3 PPA amortisation related to equity affiliates 19.2 11.2 Expenses linked directly to business combinations 17.8 19.0 EBIT 1,542.6 1,354.5

2.2 Information by destination

Consolidated order intake (direct and indirect) by destination 2017 2016

France 4,502.6 3,509.2 United Kingdom 1,153.3 1,003.2 Rest of Europe 2,918.5 3,646.3 Europe 8,574.4 8,158.7 United States and Canada 1,579.2 1,215.6 Australia and New Zealand 670.8 763.7 Asia 2,097.0 3,708.5 Middle East (a) 1,206.0 1,673.9 Rest of the world (a) 792.2 993.9 Emerging markets 4,095.2 6,376.3 TOTAL 14,919.6 16,514.3

Sales (direct and indirect) by destination 2017 2016

France 3,840.0 3,580.6 United Kingdom 1,351.9 1,272.3 Rest of Europe 3,386.9 3,227.1 Europe 8,578.8 8,080.0 United States and Canada 1,459.6 1,555.9 Australia and New Zealand 875.0 759.2 Asia 2,218.8 2,047.9 Middle East (a) 1,641.5 1,515.0 Rest of the world (a) 1,021.7 926.8 Emerging markets 4,882.0 4,489.7 TOTAL 15,795.4 14,884.8

(a) The 2016 figures have been adjusted to reflect the transfer of some countries out to the “Near and Middle East” region into the “Rest of the world” region within the Group’s organisation.

46 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

2.3 Sales by category of contracts

More than half of the Group’s sales come from contracts specifically negotiated with the customer, who draws up the technical specifications and defines the specific provisions linked to the contract. These contracts meet different needs depending on the customer, and are generally long- term contracts.

2017 2016

Construction contracts 8,089.6 7,312.7 Sales of goods and equipment 3,523.8 3,549.3 Services 4,110.7 3,951.3 Other 71.3 71.5 1 TOTAL 15,795.4 14,884.8

NOTE 3. IMPACT OF CHANGES IN SCOPE OF CONSOLIDATION

As part of the transaction, Thales signed compensation agreements with 3.1 Main changes in scope key managers subject to their remaining with the company until 2020. of consolidation The related amounts are being taken to income on a straight-lline basis in tranches over the vesting period. These amounts are recognised in In 2017: income from operations, but excluded from EBIT as they concern an event that is unusual nature (Note 2.1). In September 2017, Thales finalised the acquisition of the US company Guavus, one of the pioneers of real-time “big data” analytics, for a At the end of June 2016, Thales acquired Raytheon’s non-controlling maximum enterprise value of $215 million, subject to the achievement interest in French company TRS SAS and sold its stake in US company of significant sales growth targets. The net cash outflow reached TRS LLC to Raytheon for a net gain of $90 million (€81 million) in Thales’ $109.1 million (€90.5 million) at the closing date. The purchase price consolidated financial statements. was allocated to amortisable intangible assets in the amount of In Thales’ consolidated financial statements, the acquisition of Raytheon’s $84.2 million (mainly technology acquired) and a deferred tax liability non-controlling interest in TRS SAS led to a reclassification in equity. of $32 million. Residual goodwill amounted to $72.2 million (€60 million). The disposal of the interest in TRS LLC resulted in a disposal gain of The Company is fully consolidated. €91.8 million. Thales-Raytheon Systems Air and Missile Defense In December 2017, Thales signed an agreement with the aim of Command remains jointly owned by the Group and is accounted for under acquiring Gemalto and creating a world leader in digital security. The the equity method. offer, priced at €51 per share cum dividend (i.e. a total equity value of In October 2016, Thales sold its interest in Hanwha Thales, a approximately €4.8bn) is subject to customary regulatory approvals. It jointly-owned company that specialises in defence electronics in Korea, is expected to be completed in the second half of 2018. for €204.4 million. The disposal gain recognised in the consolidated In 2016: financial statements amounted to €113.8 million. At the end of March 2016, Thales finalised the acquisition of Vormetric, a leading provider of data protection solutions for a total of $408 million (€372.4 million). Vormetric has been consolidated since its acquisition.

3.2 Disposal of assets, changes in scope of consolidation and other

2017 2016

Disposal of investments 1.3 200.5 Hanwha- Thales (50%) – 113.8 Thales Raytheon Systems LLC (50%) – 91.8 Other 1.3 (5.1) Disposal of real estate and movable assets 2.6 4.6 Impact of settlements/ amendments to pensions plans (Note 9.3) (21.2) – Litigation (Note 11) (64.2) – TOTAL (81.5) 205.1

2017 Registration Document — THALES 47 2017 Financial Information — Consolidated financial statements

NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

4.1 Goodwill

a) Change in goodwill

Goodwill is allocated to cash-generating units (CGUs) or groups of CGUs corresponding to Thales’ Global Business Units (GBU). The changes in goodwill attributable to fully consolidated subsidiaries is presented below.

31 / 12 / 2016 Acquisitions Disposals Impairment Changes in 31/ 12 / 2017 exchange rates and other

Avionics 476.1 11.3 – – (15.2) 472.2 Space 481.8 8.6 – – (1.8) 488.6 Aerospace 957.9 19.9 – – (17.0) 960.8 Transport 875.3 – – – – 875.3 Secure Communications & Information Systems 819.4 60.4 (a) (7.0) – (30.8) 842.0 Land and Air Systems 309.8 – – – (0.2) 309.6 Defence Mission Systems 462.0 – – (2.5) 459.5 Defence and Security 1,591.2 60.4 (7.0) – (33.5) 1,611.1 TOTAL 3,424.4 80.3 (7.0) – (50.5) 3,447.2

31 / 12 / 2015 Acquisitions Disposals Impairment Changes in 31/ 12 / 2016 exchange rates and other

Avionics 472.0 – – – 4.1 476.1 Space 472.7 11.1 – – (2.0) 481.8 Aerospace 944.7 11.1 – – 2.1 957.9 Transport 875.3 – – – – 875.3 Secure Communications & Information Systems 625.1 189.9 (b) – – 4.4 819.4 Land and Air Systems 309.8 – – – – 309.8 Defence Mission Systems 461.0 – – – 1.0 462.0 Defence and Security 1,395.9 189.9 – – 5.4 1,591.2 TOTAL 3,215.9 201.0 – – 7.5 3,424.4

(a) Goodwill on Guavus after purchase price allocation (may not be definitive). (b) Goodwill on Vormetric after purchase price allocation.

b) Impairment tests The assumptions used concern growth in sales and terminal values and are based on reasonable estimations in line with specific data available Goodwill is subject to annual impairment tests in accordance with the for each business sector (generally, terminal value is based on the Group’s budgetary timetable. Value in use is determined on the basis of average income from operations over the three years of the strategic plan, discounted future operating cash flows over a three- year period and a with growth capped at 2%). terminal value. This calculation is based on data from the strategic plans At end- 2017, the overall value in use of the group CGUs was higher prepared in accordance with Group procedures. In certain specific than its carrying amount. cases (recent acquisitions, non-typical annual results, etc.), the terminal value is determined based on forecasts over an appropriate period of time. c) Sensitivity of values in use At end- 2017 and end- 2016, impairment tests were performed with the initial assumption of a 8.5% discount rate for all CGUs (each of which The Group also tests the sensitivty of values in use based on reasonable presented a similar degree of risk given that the specific CGU risks are key assumptions. At the end of 2017, a 1% increase in the discount rate, a factored into forecasts). 1% decrease in the growth rate or a 2% decrease in operating profitability of the group CGUs would not require any additional impairments.

48 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

4.2 Plant, property and equipment and other intangible assets a) Change in net assets

Acquired Development Other Property, Total intangible costs intangible plant and assets (PPA) assets equipment

Net value at 1 January 2016 649.2 123.3 90.4 1,696.7 2,559.6 Acquisitions / increases – 6.6 45.1 428.6 480.3 Disposals – – – (8.3) (8.3) 1 Amortisation of acquistion- related intangible assets (107.3)–––(107.3) Other depreciation and amortisation – (48.1) (39.1) (297.4) (384.6) Changes in scope, exchange rates and other 232.0 (2.5) 9.2 (20.7) 218.0 Net value at 31 December 2016 773.9 79.3 105.6 1,798.9 2,757.7 Acquisitions / increases – 10.4 55.5 373.0 438.9 Disposals – – – (8.2) (8.2) Amortisation of acquistion- related intangible assets (113.0)–––(113.0) Other depreciation and amortisation – (35.0) (40.5) (315.6) (391.1) Changes in scope, exchange rates and other 33.7 (2.5) 10.1 (29.0) 12.3 NET VALUE AT 31 DECEMBER 2017 694.6 52.2 130.7 1,819.1 2,696.6 b) Breakdown by item

31/12/2017 31/12/2016

Gross Depr., amort., Net Net and impairment

Technologies acquired 849.7 (416.3) 433.4 439.6 Customer relationships acquired 555.8 (322.3) 233.5 277.4 Order backlog acquired 271.7 (253.7) 18.0 28.5 Other 71.3 (61.6) 9.7 28.4 Intangible assets acquired (business combinations) 1,748.5 (1,053.9) 694.6 773.9 Development costs 867.6 (815.4) 52.2 79.3 Other 780.5 (649.8) 130.7 105.6 Intangible assets 3,396.6 (2,519.1) 877.5 958.8 Land 52.6 (0.8) 51.8 50.2 Buildings 1,681.7 (924.1) 757.6 712.9 Technical facilities and industrial equipment and tooling 2,424.5 (1,809.1) 615.4 646.6 Other 1,135.8 (741.5) 394.3 389.2 Property, plant and equipment 5,294.6 (3,475.5) 1,819.1 1,798.9

4.3 Lease commitments

Irrevocable lease and rental commitments at 31 December 2017 and 2016 are as follows:

Irrevocable rental commitments Total Less than 1 to 5 More than 1 year years 5 years

31 December 2017 1,190.5 201.7 566.1 422.7 31 December 2016 1,345.4 212.5 615.9 517.0

2017 Registration Document — THALES 49 2017 Financial Information — Consolidated financial statements

NOTE 5. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES

5.1 Joint ventures

a) Group share in net equity and net income of joint ventures

Investments in Share in Share in joint ventures net income comprehensive income 31/12/2017 31/12/2016 2017 2016 2017 2016

Naval Group (35%) 730.7 713.9 29.1 23.9 18.0 26.9 Other joint ventures (a) 297.1 283.6 59.4 48.5 54.3 12.1 TOTAL 1,027.8 997.5 88.5 72.4 72.3 39.0

(a) Not individually material, the value of each investment representing less than 10% of the total.

b) Change in investments in joint ventures

31 / 12 / 2017 31 / 12 / 2016

Investment at 1 January 997.5 1,126.4 Share in net income of joint ventures 88.5 72.4 Translation adjustment (7.9) (26.9) Cash flow hedge (3.5) (0.5) Available for sale financial assets (6.7) 6.7 Actuarial gains (losses) on pensions 1.9 (12.7) Share in comprehensive income 72.3 39.0 Dividends paid (38.5) (43.6) Scope variation (Hanwha Thales Co., Ltd in 2016) (2.6) (112.3) Other (0.9) (12.0) INVESTMENTS AT 31 DECEMBER 1,027.8 997.5

c) Naval Group summary financial information

Thales has a 35% stake in the share capital of Naval Group, a subsidiary jointly controlled with the French State. Naval Group is a French industrial group specialised in naval defence and marine infrastructures. The financial statements of Naval Group, after Thales restatements (mainly linked to acquisition- related intangible assets) are presented below:

Summary balance sheet based on a 100% interest 31 / 12 / 2017 31 / 12 / 2016

Non- current assets 2,057.3 2,359.9 Current assets 5,947.0 6,078.9 Total assets 8,004.3 8,438.8 Restated equity attributable to shareholders of the Company 1,253.5 1,205.3 Non- controlling interests (13.0) 86.2 Non- current liabilities 601.2 649.6 Current liabilities 6,162.6 6,497.7 Total equity and liabilities 8,004.3 8,438.8

50 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Consolidation by Thales 31 / 12 /20 17 31 / 12 /20 16

Restated equity attributable to shareholders of the Company 1,253.5 1,205.3 % of Thales’ interests 35% 35% Thales’ share 438.7 421.9 Goodwill 292.0 292.0 Share in net assets of the joint venture 730.7 713.9

Summary profit and loss account based on a 100% interest 2017 2016 1 Sales 3,698.2 3,191.2 Income (loss) from operating activities after impact of equity affiliates (a) 56.5 4.3 Financial income 2.4 23.9 Tax (85.9) 33.3 Restated net income (a) (27.0) 61.5 • of which, attributable to shareholders of the Company 83.2 68.3 • of which, non- controlling interests (110.2) (6.8)

(a) After Thales restatements (mainly linked to acquisition- related intangible assets).

Consolidation by Thales 2017 2016

Restated net income attributable to shareholders of the Company 83.2 68.3 % of Thales’ interests 35% 35% Share in income of the joint venture 29.1 23.9 • of which, impact of PPA (18.8) (9.9) • of which, share in income before PPA 47.9 33.8 Dividends received from the joint venture – – d) Commitments toward joint ventures

At 31 December 2017, outstanding sureties, endorsements and guarantees granted by Thales S.A. (parent company) to its joint ventures amounted to €321,9 million (€238.3 million at 31 December 2016). The Group’s policy is to issue guarantees on commitments by joint ventures in proportion to its equity interest, or to secure counter-guarantees from the other shareholders in proportion to their interest. e) Transactions with joint ventures (related parties)

The volume of transactions with joint ventures and their joint shareholders is as follows:

2017 2016

Sales 520.3 559.7 Purchases 202.9 189.7 Loans and current accounts receivable 45.8 47.5 Borrowings and current accounts payable 5.8 12.4

2017 Registration Document — THALES 51 2017 Financial Information — Consolidated financial statements

5.2 Associates

The main associates are listed in Note 16. None of these companies is individually material with regard to consolidated aggregates. The mandatory disclosures are therefore presented in aggregate form in the table below:

a) Changes in investment in associates

31 / 12 / 2017 31 / 12 / 2016

Investments in associates at 1 January 219.5 359.5 Share in net income of equity affiliates 46.3 47.2 Translation adjustment (17.5) (30.7) Cash flow hedge (2.3) 0.5 Actuarial gains (losses) on pensions (0.7) 0.4 Total comprehensive income 25.8 17.4 Dividends paid (40.8) (29.1) Changes in scope (TRS LLC in 2016) – (127.8) Other 5.6 (0.5) INVESTMENTS IN ASSOCIATES AT 31 DECEMBER 210.1 219.5

b) Commitments towards associates

The Group has no material off- balance sheet commitments towards associates.

NOTE 6. FINANCING AND FINANCIAL INSTRUMENTS

6.1 Financial income

a) Net interest income

2017 2016

Interest expense: • on gross debt (24.3) (36.4) • on interest rate swaps 8.0 25.1

(16.3) (11.3) Interest income / cash and cash equivalents 21.3 17.6 TOTAL 5.0 6.3

b) Other financial income

2017 2016

Foreign exchange gains (losses) (17.4) (2.4) Cash flow hedge, ineffective portion (10.9) (5.9) Change in fair value of currency derivatives (a) (69.9) (70.3) Foreign exchange gains (losses) (98.2) (78.6) Dividends received 2.6 2.8 Impairment of non consolidated investments, loans and other financial assets (0.2) (1.4) Other (3.5) (3.4) TOTAL (99.3) (80.6)

(a) Includes the change in the fair value of premiums /discounts (losses of €65.3 million in 2017 and €54.0 million in 2016), the time value of derivatives documented as future cash flow hedges (losses of €5.7 million in 2017 and €7.3 million in 2016), as well as changes in the fair value of derivatives not documented as hedges.

52 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

6.2 Net cash (net debt)

Group net cash is as follows:

31 / 12 /2017 31 / 12 /20 16

Current financial assets 332.0 265.9 Cash and cash equivalents 4,282.7 3,616.9 Cash and other short-term investments (I) 4,614.7 3,882.8 Borrowings and debt, long- term portion 953.5 1,433.7 Borrowings and debt, short- term portion 707.3 111.4 1 Fair value of interest rate derivatives (a) (17.5) (27.9) Gross debt (II) 1,643.3 1,517.2 NET CASH (I- II) 2,971.4 2,365.6

(a) The value of borrowings documented as fair value hedges takes into account changes in the fair value of the hedged risk. This change in the value of the debt is offset by the remeasurement of interest- rate swaps used as hedges (Note 6.5). a) Current financial assets

31 / 12 / 2017 31 / 12 /20 16

Current accounts receivable with related parties 3.1 8.5 Marketable securities 325.0 250.0 Accrued interest 3.9 7.4 CURRENT FINANCIAL ASSETS 332.0 265.9

Marketable securities consist of investments in short- term deposits (3 to 12 months) with tier- one banks. b) Cash and cash equivalents

At 31 December 2017, cash recorded under consolidated assets amounted to €4,282.7 million (€3,616.9 million in 2016) and included: • €3,450.5 million held by the parent company and available for immediate use (€3,183.1 million in 2016). These amounts include €2,199.2 million (€2,886.2 million in 2016) in very short- term deposits with tier- one banks or money market funds; • €832.2 million in the credit balances of subsidiaries (€433.8 million in 2016), most of them outside France. This figure includes payments received in the last days of the financial year and subsequently transferred to the cash pooling account. c) Borrowings and debt

31 / 12 / 2017 31 / 12 / 2016

Bond maturing in 2023 593.9 595.6 Bond maturing in 2021 312.0 315.9 Bond maturing in 2018 500.6 502.8 Interest rate derivatives (Note 6.5) (17.5) (27.9) Current accounts in credit with related parties (a) 115.2 48.7 Bank overdrafts 62.0 36.6 Subscription commitments 43.8 11.2 Other debt 33.3 34.3 GROSS DEBT 1,643.3 1,517.2

(a) Of which, at the end of 2017, €103.6 million toward Leonardo (€32.2 million at the end of 2016).

2017 Registration Document — THALES 53 2017 Financial Information — Consolidated financial statements

Gross debt’s evolution

31 / 12 / 2016 Other changes 31/12/2017

Cash Scope Exchange Fair value flow rates and other

Gross debt 1,517.2 74.1 51.7 (4.4) 4.7 1,643.3

Nature of bonds Nominal value Maturity Nature Nominal rate Effective rate (excluding impact (excluding impact of hedging) of hedging)

Bond maturing in 2023 €600 million June 2023 Fixed incl. €400 million swapped at variable rates 0.75% 0.84% Bond maturing in 2021 €300 million March 2021 Fixed incl. €300 million swapped at variable rates 2.25% 2.40% Bond maturing in 2018 €500 million March 2018 Fixed incl. €300 million swapped at variable rates 1.625% 1.74%

In January 2018, Thales issued a €500 million 0.75% fixed- rate bond maturing in 7 years. This issue will be used in particular to refinance the bond maturing in March 2018.

Breakdown of gross debt by maturity

31 /12 / 2017 Total 2018 2019 2020 2021 > 2021

Gross debt (a) 1,643.3 704.2 45.3 1.4 295.5 596.9 Contractual cash flows 1,684.6 700.9 51.0 9.7 309.8 613.2

(a) After deduction of fair value of interest- rate derivatives.

31 / 12 / 2016 Total 2017 2018 2019 2020 > 2020

Gross debt (a) 1,517.2 111.4 509.4 4.3 1.4 890.7 Contractual cash flows 1,572.3 106.9 523.4 11.1 8.9 922.0

(a) After deduction of fair value of interest- rate derivatives.

Breakdown of gross debt by currency

31 / 12 /2017 31 / 12 / 2016

Euro 1,538.9 1,468.6 Livre sterling 9.4 13.7 US Dollar 38.6 11.6 Other 56.4 23.3 TOTAL 1,643.3 1,517.2

After impact of the related derivative instruments.

6.3 Non-current financial assets

a) Non-consolidated investments

% 31 / 12 /20 17 31 / 12 /20 16

Investments held by Thales International Offsets (a) N/ A 14.2 28.0 Other (b) 73.5 54.3 TOTAL 87.7 82.3

(a) Group subsidiary in charge of negotiating and implementing indirect offset obligations.

54 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

(b) Investments of less than €25 million, including Tronics Microsystems and Spaceflight Industries investments at 31 December 2017, and Aviovision, and Tronics Microsystems investments at 31 December 2016. b) Non-current financial assets

31 / 12 / 2017 31 / 12 / 2016

Loans to related parties 88.2 86.6 Loans to employee shareholding 21.2 0.3 Loans and other financial assets at amortised cost 40.0 37.1 Loans and other financial assets at market value 22.0 19.3 1 Gross value 171.4 143.3 Impairment (4.9) (5.0) NET 166.5 138.3

6.4 Changes in net cash

2017 2016

Net cash (debt) at 1 January 2,365.6 1,977.6 Net cash flow from operating activities 1,713.3 1,337.9 Less, reduction in pension deficits 82.3 88.3 Net operating investments (430.7) (472.0) Free Operating cash- flow 1,364.9 954.2 Acquisitions of subsidiaries and affiliates: (121.4) (391.2) • including, Guavus (90.5) – • including, Vormetric – (365.4) Disposals of subsdiaries and affiliates 41.9 296.9 • including, Hanwha Thales Co. Ltd (50%) – 204.4 • including, equalisation payment / Thales – Raytheon Systems – 81.0 Less, reduction of U.K. pension deficits (82.3) (88.3) Changes in loans (26.7) (26.5) Dividends paid by the parent company (348.9) (296.8) Third party share in dividend distributions of subsidiaries (68.1) (48.3) Treasury shares and subscription options exercised (38.3) 4.9 Changes in exchange rates: translation and financing operations (63.6) (19.8) Other (51.7) 2.9 Total change 605.8 388.0 Net cash (debt) at 31 December 2,971.4 2,365.6

2017 Registration Document — THALES 55 2017 Financial Information — Consolidated financial statements

6.5 Fair value of financial assets and liabilities

31 / 12 / 2017 31 / 12 / 2016

At cost/ Fair value through: Value in Fair Value in Fair amortised Equity Profit balance value balance value cost or loss sheet sheet

Non-current financial assets Non- consolidated investments – 87.7 – 87.7 87.7 82.3 82.3 Non- current loans and financial assets 144.5 – 22.0 166.5 166.5 138.3 138.3 Non- current derivatives documented as hedges – – 17.0 17.0 17.0 27.9 27.9

Current financial assets Derivative instruments documented as hedges – 246.7 3.1 249.8 249.8 154.2 154.2 Derivative instruments not documented as hedges – – 7.7 7.7 7.7 7.5 7.5 Current financial assets 332.0 – – 332.0 332.0 265.9 265.9 Cash and cash equivalents 3,259.1 – 1,023.6 4,282.7 4,282.7 3,616.9 3,616.9

Non-current financial liabilities Long- term debt 939.1 – 14.4 953.5 980.8 1,433.7 1,477.4 Non- current derivative instruments, liabilities – – 2.6 2.6 2.6 – –

Current financial liabilities Derivative instruments documented as hedges – 170.3 – 170.3 170.3 458.3 458.3 Derivative instruments not documented as hedges – – 9.4 9.4 9.4 20.0 20.0 Short- term debt 704.2 – 3.1 707.3 709.6 111.4 111.4

Receivables, payables and refundable grants are financial assets and The fair value of bond debt is based on quoted prices (level 1). The fair liabilities within the meaning of IAS 32/ 39 and are measured at value of other borrowings and debt is determined for each loan by amortised cost. They are detailed in the Note 10.1. discounting the expected future cash flows at the Euribor interest rate at the closing date, adjusted for the Group’s credit risk (level 2). IFRS 13 categorises valuation techniques for each financial asset and liabilitiy according to a fair value hierarchy with three levels: The fair value of monetary and non- monetary UCITS is measured based on the last known net asset value. The fair value of interest rate level 1: valuation is based on quoted (non adjusted) prices in active • products (certificates of deposit, short- term deposits, negotiable markets for identical assets or liabilities; medium-term notes, etc.) is based on the discounting of coupons flows • level 2: valuation is based on information other than quoted market (nominal and interest) over the remaining life of the product at the prices that is observable for the asset or liability, either directly or indirectly; closing date. The discount rate used is the market rate corresponding to the maturity and product characteristics. • level 3: valuation is based on unobservable information for an asset or liability. The fair value of derivatives is based on models commonly used to measure these financial instruments (models including observable market The fair value of financial assets and liabilities recorded at amortised cost data). Counterparty defaut risk and credit risk have no material impact approximates their carrying amount, except for borrowings and debts. on the fair value of derivatives.

56 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

6.6 Financial risk

Thales’ financial risk management policy is described in detail in the Group management report (chapter 1 of the 2017 Registration Document, see Section 1.1.2). a) Market risk

Thales hedges its foreign exchange and interest-rate risk using over-the- counter derivatives from tier-one banks. The book value of derivatives used to manage the Group’s market risk is presented below:

31 / 12 / 2017 31 / 12 / 2016 Assets Liabilities Assets Liabilities 1 Non-current derivatives: • foreign exchange derivatives – – – – • interest- rate derivatives 17.0 2.6 27.9 –

Current derivatives: • foreign exchange derivatives 252.8 178.7 160.4 476.8 • interest- rate derivatives 4.7 1.0 1.3 1.5 Foreign exchange derivatives, net 74.1 (316.4) Interest- rate derivatives, net 18.1 27.7

Foreign exchange risk Thales hedges currency risks arising in connection with the negotiation of contracts denominated in currencies other than the main production currency, currency risks generated by ordinary commercial operations, risks relating to cash pooling and, in some cases, risks relating to its net investments in foreign operations. At 31 December 2016 and 2017, the amount of derivatives in the portfolio can be analysed as follows:

Foreign exchange derivatives 31 / 12 / 2017 31 / 12 / 2016

Nominal value

USD GBP Other Total Market Nominal Market value value value

Negotiations and trade operations hedges

Documented as hedges Forward currency sales 3,650.1 878.4 2,384.4 6,912.9 144.4 7,710.7 (179.1) (144.4) (179.1) Forward currency purchases 1,471.4 992.8 1,930.6 4,394.8 4,199.2 Currency sales (call and put options) – – – – – 90.6 0.2 – 0.2 Currency purchases (call and put options) – – – – 14.8 –

Not documented as hedges Forward currency sales – – – – – – – – – Forward currency purchases – – – – – Currency sales (call and put options) 90.9 – 22.3 113.2 0.1 3.5 0.4 0.1 0.4 Currency purchases (call and put options) 111.1 – 1.8 112.8 11.2 Hedges related to cash pooling Currency sales: currency swaps 82.5 – 270.3 352.8 (3.1) 313.7 (13.8) (3.1) 13.8 Currency purchases: currency swaps 1.3 37.1 71.9 110.3 924.9 Hedges related to net investments in foreign operations (hedge accounting) Currency sales: foreign exchange swaps 619.5 – – 619.5 (67.3) 716.5 (124.1) (67.3) (124.1) Currency purchases: foreign exchange swaps – 532.5 – 532.5 561.0 NET ASSET (LIABILITY) 74.1 (316.4)

Nominal amounts are translated into euros at the closing rate. The maturity of the derivatives used to hedge commercial contracts is consistent with the average maturities of these contracts, typically less than five years. Other derivatives have a maturity of less than one year.

2017 Registration Document — THALES 57 2017 Financial Information — Consolidated financial statements

The change in the value of financial instruments (forward transactions) The change in value of derivative instruments matched with commercial used to hedge cash flow is recognised in equity for the spot rate tender portfolio, which are not eligible for hedge accounting, is component. A decrease (increase) of 5% in the dollar against the main recognised in profit and loss. currencies (EUR, GBP and CAD) would have had a positive (negative) A decrease (increase) of 5% in the dollar against the main currencies impact on equity of approximately €104 million at 31 December 2017 (EUR, GBP and CAD) would have no impact on profit or loss at and €153 million at 31 December 2016. 31 December 2017, as at 31 December 2016.

Interest-rate risk Thales is exposed to interest- rate volatility and in particular its impact on the conditions associated with variable-rate financing. To limit this risk, Thales operates an active interest- rate hedging policy. At 31 December 2016 and 2017, the amount of derivatives in the portfolio was as follows:

Interest-rate derivatives 31 / 12 / 2017 31 / 12 / 2016

Nominal Market value Nominal Market value

Fair value hedge (swaps with variable rate payable): • swaps related to bond maturing in 2023 400.0 (2.6) 400.0 0.1 • swaps related to bond maturing in 2021 300.0 17.0 300.0 21.6 • swaps related to bond maturing in 2018 300.0 3.1 300.0 6.2 17.5 27.9 Cash flow hedge (financing of projects at variable- rate swapped to fixed-rate) 8.4 (0.7) 12.8 (1.3)

Swaps not documented as hedges: • cross- currency swap with fixed- rate payable, hedging a loan 14.3 1.6 15.2 1.3 • swap with fixed- rate payable, hedging a loan 3.9 (0.3) 6.3 (0.2) NET ASSET 18.1 27.7

The table below summarises the Group’s exposure to interest- rate risk before and after hedging.

31 / 12 / 2017 < 1 year > 1 year Total

Fixed-rate Variable-rate Fixed-rate Variable-rate Fixed-rate Variable-rate

Gross debt (a) (512.1) (192.1) (891.8) (47.3) (1,403.9) (239.4) Financial assets, cash and cash equivalents – 4,614.7 – – – 4,614.7 NET EXPOSURE BEFORE IMPACT OF DERIVATIVE INSTRUMENTS (512.1) 4,422.6 (891.8) (47.3) (1,403.9) 4,375.3 Hedging derivatives 296.2 (296.2) 695.4 (695.4) 991.6 (991.6) NET EXPOSURE AFTER IMPACT OF DERIVATIVE INSTRUMENTS (215.9) 4,126.4 (196.4) (742.7) (412.3) 3,383.7

31 / 12 / 2016 < 1 year > 1 year Total

Fixed-rate Variable-rate Fixed-rate Variable-rate Fixed-rate Variable-rate

Gross debt (a) (14.5) (96.9) (1,387.1) (18.7) (1,401.6) (115.6) Financial assets, cash and cash equivalents – 3,882.8 – – – 3,882.8 NET EXPOSURE BEFORE IMPACT OF DERIVATIVE INSTRUMENTS (14.5) 3,785.9 (1,387.1) (18.7) (1,401.6) 3,767.2 Hedging derivatives (4.0) 4.0 991.2 (991.2) 987.2 (987.2) NET EXPOSURE AFTER IMPACT OF DERIVATIVE INSTRUMENTS (18.5) 3,789.9 (395.9) (1,009.9) (414.4) 2,780.0

(a) After deduction of the fair value of interest- rate derivatives.

Based on the Group’s average net cash (taking into account hedging instruments), a 1 point rise in interest rates would increase net interest income by €25.9million in 2017 (€21.6 million in 2016).

58 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information b) Customer credit risk Credit risk relating to public sector customers Public, government and institutional customers account for around 75% Credit risk relates to the risk that a party to a contract will default on its of Thales’ sales. Thales works with a large number of countries. Some commitments or fail to pay what it owes. of them could present a significant credit risk which could, for example, lead them to suspend an order in production, or render them unable to Risk of default by private sector customers pay on delivery, as agreed under the terms of the contract. To limit its Non- governmental customers (aircraft manufacturers, airlines, private exposure to these risks, Thales takes out insurance with export credit infrastructure operators and industry) account for approximately 25% of agencies (such as BPIFrance) or private insurers. Thales’ sales. These customers may encounter major and/ or prolonged At 31 December 2017, only three customers accounted for annual sales financial difficulties that could lead to payment defaults or order cancellations. in excess of €500 million: the French State (around €2.8 billion), the UK Such occurrences could have a negative impact on Thales’ sales, profitability government (around €1 billion) and the Australian government (around and financial position. €0.7 billion). At 31 December 2017, these three countries had first-class To mitigate these risks, Thales conducts regular analyses of the ability of or high-quality ratings (France: AA by S&P Global Ratings and Aa2 by 1 customers to meet their obligations. When necessary, Thales may request Moody’s, the United Kingdom: AA by S&P Global Ratings and Aa2 by bank guarantees or corporate guarantees, or may use credit insurers. Moody’s, – Australia: AAA by S&P Global Ratings and Aaa by Moody’s).

The Group’s Finance department consolidates all the information relating to the Group’s exposure to credit risk, notably by identifying and analysing the ageing of overdue accounts and notes receivable that have not been impaired. At 31 December 2017 and 2016, the ageing of these accounts and notes receivable is as follows:

31/12/2017 Total Accounts and notes receivables past due

Less than 3 to 6 months More than 3 months 6 months Overdue accounts and notes receivables not impaired State and similar 270.9 122.5 33.1 115.3 Other 378.3 172.9 68.5 136.9

31/12/2016 Total Accounts and notes receivables past due

Less than 3 to 6 months More than 3 months 6 months Overdue accounts and notes receivables not impaired State and similar 158.0 80.1 10.3 67.6 Other 517.6 274.3 101.3 142.0

Credit risk related to banking counterparties

Financial investments are diversified. They relate to first ranking debt and and receivable in the event of default by one of the contracting parties. are negotiated with tier- one banks. These conditional offsetting agreements do not meet the eligibility criteria within the meaning of IAS 32 for offsetting derivative instruments Thales Group trades over- the- counter derivatives with tier- one banks recorded under assets and liabilities. However, they do fall within the under agreements which provide for the offseting of amounts payable scope of disclosures under IFRS 7 on offsetting.

31/12/2017 Gross value Offset amounts Net presented Impact of other Net (before offset) on balance in balance offsetting agreements sheet sheet Offsetting Financial agreements collaterals

Derivatives – Assets 274.5 – 274.5 (167.0) – 107.5 Derivatives – Liabilities 182.3 – 182.3 (167.0) – 15.3

31/12/2016 Gross value Offset amounts Net presented Impact of other Net (before offset) on balance in balance offsetting agreements sheet sheet Offsetting Financial agreements collaterals

Derivatives – Assets 189.6 – 189.6 (185.0) – 4.6 Derivatives – Liabilities 478.3 – 478.3 (185.0) – 293.3

2017 Registration Document — THALES 59 2017 Financial Information — Consolidated financial statements

c) Liquidity risk The parent company’s financing programmes are rated by S&P Global Rating and Moody’s. At the date of publication, Thales’ credit risk The Group’s liquidity risk is the risk of it being unable to meet its cash ratings were as follows: needs out of its financial resources. In particular, it relates to Thales’ level of exposure to changes in the main market indicators that could Moody’s S&P Global lead to an increase in the cost of credit or even to a temporary limitation Ratings of access to external sources of financing. Medium and long- term loans A2 A- The Group manages this risk by trying to anticipate its cash needs and Outlook Negative Negative ensures that these are covered by the Group’s short-term and long-term watch financial resources, as follows: Commercial paper and short- term loans Prime- 1 A-2 shareholders’ equity (Note 8.1); • Moody’s and S&P Global ratings downgraded their outlook (from • gross debt (listed by date of maturity in Note 6.2); “stable” to “negative” and “negative watch” respectively) following the announcement on 17 December 2017 of the planned cash tender offer committed, undrawn credit facilities granted by banks amounted to • for Gemalto. If this acquisition, partly financed from the Group’s own €1,500 million with maturing in 2021 as backup to the commercial cash flow and partly through borrowings, goes ahead, it would in all paper programme and acting as a financing reserve. likelihood cause Thales’s rating to be lowered, due mainly to the At 31 December 2017, the Group also had an undrawn bridge loan to change in the Group’s financing structure. finance its proposed offer for the acquisition of Gemalto. The decrease of Thales’ credit risk rating would not trigger the financial covenants included in its financing contracts. The single accelerated repayment clause would apply only in the event that the French State ceased to hold its golden share and, simultaneously, the ratio of consolidated net debt to EBITDA (1) were to exceed 3x. A lower rating would result in an increase (capped) in the margins applicable to the €1.5 billion committedcredit facility. A higher rating would lead to a decrease in the applicable margin (with a minimum threshold). No other financing arrangements are subject to covenants based on financial ratios.

NOTE 7. INCOME TAX

The income tax charge takes into account specific local tax rules, including the tax consolidation systems in France and the United States, group Relief in the United Kingdom and Organschaft rules in Germany.

7.1 Income tax expense

2017 2016

Current tax (288.8) (262.4) Deferred tax 24.6 6.8 TOTAL (264.2) (255.6)

(1) EBITDA, as defined in the financing agreements, is the sum of operating income, depreciation of non-current assets and impairment of intangible assets, net of goodwill amortisation. This indicator is calculated in accordance with French GAAP.

60 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Tax proof

2017 2016

Net income 887.1 1,014.6 Less: income tax 264.2 255.6 Less: share in net income of equity affiliates (134.8) (119.6) Net income before tax and share in net income of equity affiliates 1,016.5 1,150.6 Theoretical average tax rate 30.8% 29.6% Theoretical tax benefit (expense) (312.5) (340.9) 1 Reconciliation items: • Impact of tax credits 74.0 76.9 • Taxes not taken into account in the theoretical rate (63.8) (29.2) • Impact of dividends paid 54.3 (18.8) • Impact of change in deferred tax rates (28.2) (7.7) • Change in provision for deferred tax assets (8.3) 38.7 • Ajustments in respect of prior periods 7.4 5.2 • Impact of partial or total exemption of disposals and other 12.9 20.2 Income tax benefit (expense) recognised in profit and loss (264.2) (255.6) Effective tax rate 26.0% 22.2%

The theoretical average rate corresponds to the sum of theoretical taxes Taxes not taken into account in the theoretical rate mainly include state of consolidated companies, divided by the consolidated net income taxes in the United States, IRAP in Italy, taxes on foreign establishments, before tax and the share in net income of equity affiliates. The and the additional contribution in France in 2017 (a negative amount of theoretical tax of each consolidated company corresponds to the €50.3 million). application of the local tax rate to net income before tax. Accordingly, In 2016, the impact of dividends paid mainly included the 3% tax the theoretical average tax rate reflects the relative contribution of the introduced in France at the end of 2012 (a negative amount of different countries to consolidated net income. France, which has a tax €12.9 million). This tax, deemed unconstitutional, was repaid by the rate of 34.43%, represented almost 70% of income before tax in both French government at the end of 2017 (net impact in 2017 of €48.5 million 2016 and 2017. covering financial years 2013- 2017). The impact of tax credits includes: The impact of changes in deferred tax rates mainly includes: the impact of tax exemption on research tax credits (€176 million in • in 2016, the impact of the decrease in tax rate enacted in France 2017, €176.2 million in 2016) and tax credits for competitiveness • with effect from 2020 (to 28.92% from 34.43%); and jobs (crédit d’impôt pour la compétitivité et l’emploi – CICE) recognised in operating income; • in 2017, the impact of the new gradual decrease in tax rate in France (a negative amount of €7.7 million) and the impact of the the tax advantages related to research, which are recognised in • reduction in the federal tax rate in the USA from 35% to 21% (a income tax (notably in United States, Australia and the Netherlands). negative amount of €22.0 million).

7.2 Deferred tax recognised in equity

2017 2016

Fully consolidated entities Base Tax Base Tax

Translation of the financial statements of foreign subsidiaries (90.4) – 35.8 – Net foreign investment hedges – – (3.9) 1.3 Cash flow hedges 401.4 (113.0) 52.5 (18.9) Available for sale financial assets (1.0) – 3.5 – Items reclassified to income 310.0 (113.0) 87.9 (17.6) Actuarial gains and losses / pensions – United Kingdom 98.7 6.5 (553.0) 11.5 (a) Actuarial gains and losses / pensions – Other countries (49.3) (3.3)(b) (108.0) 10.8 (b) Items not reclassified to income 49.4 3.2 (661.0) 22.3 Treasury shares and share- based payment 6.4 7.1 TOTAL DEFERRED TAX RECOGNISED IN EQUITY (103.4) 11.8

(a) Release of a portion of the provision for deferred taxes linked to pensions in the United Kingdom. (b) Including, a negative amount of €18.6 million in 2017, and a negative amount of €16.5 million in 2016, due to the tax cut with future effect in France.

2017 Registration Document — THALES 61 2017 Financial Information — Consolidated financial statements

7.3 Tax assets and liabilities presented in the balance sheet

01 / 01/ 2017 Income Equity Cash flow Changes in exch. Other 31/12 / 2017 (expense) rates, scope Current income tax assets 59.8 – – (23.2) – – 36.6 Current income tax liabilities (59.0) (288.8) – 113.8 (1.3) 181.3 (54.0) Current income tax, net 0.8 (288.8) – 90.6 (1.3) 181.3 (17.4) Deferred tax assets 975.8 (50.7) (103.4) – 14.3 22.1 858.1 Deferred tax liabilities (294.6) 75.3 – – (18.3) – (237.6) Deferred tax, net 681.2 24.6 (103.4) – (4.0) 22.1 620.5 TOTAL (264.2) (103.4) 90.6

01 / 01/ 2016 Income Equity Cash flow Changes in exch. Other 31/12 / 2016 (expense) rates, scope Current income tax assets 70.8 – – (11.0) – – 59.8 Current income tax liabilities (63.7) (262.4) – 110.4 – 156.7 (59.0) Current income tax, net 7.1 (262.4) – 99.4 – 156.7 0.8 Deferred tax assets 967.0 (37.6) 11.8 – 28.0 6.6 975.8 Deferred tax liabilities (257.9) 44.4 – – (81.1) – (294.6) Deferred tax, net 709.1 6.8 11.8 – (53.1) 6.6 681.2 TOTAL (255.6) 11.8 99.4

a) Current income tax

Income tax paid is reported net of tax credits utilised. The allocation of tax credits is presented under “Other”.

b) Deferred tax

Changes by nature

01 / 01 / 2017 (Expense)/ Equity Changes in 31/ 12 / 2017 Income for exch. rates, the period scope and other

Temporary differences: 884.2 66.3 (133.4) (4.3) 812.8 • pensions and other employee benefits 593.3 (12.5) (19.7) 50.8 611.9 • intangible assets (310.1) 69.9 – (4.8) (245.0) • reserve for losses at completion 141.5 (12.0) – 3.4 132.9 • other 459.5 20.9 (113.7) (53.7) 313.0 Tax loss carry- forwards 192.4 (33.1) – 15.2 174.5 Total 1,076.6 33.2 (133.4) 10.9 987.3 O / w not recognised in the balance sheet (395.4) (8.6) 30.0 7.2 (366.8) Total net deferred tax assets 681.2 24.6 (103.4) 18.1 620.5

62 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

01 / 01 / 2016 (Expense)/ Equity Changes in 31/ 12 / 2016 Income for exch. rates, the period scope and other

Temporary differences: 846.7 35.8 80.5 (78.8) 884.2 • pensions and other employee benefits 531.1 (21.3) 104.3 (20.7) 593.3 • intangible assets (262.5) 32.8 – (80.4) (310.1) • reserve for losses at completion 118.6 24.1 – (1.2) 141.5 • other 459.5 0.2 (23.8) 23.6 459.5 Tax loss carry- forwards 248.0 (67.7) – 12.1 192.4 Total 1,094.7 (31.9) 80.5 (66.7) 1,076.6 1 O / w not recognised in the balanche sheet (385.6) 38.7 (68.7) 20.2 (395.4) Total net deferred tax assets 709.1 6.8 11.8 (46.5) 681.2

Tax loss carry- forwards Total tax loss carry- forwards represent a potential tax saving of €174.5 million at 31 December 2017 (€192.4 million at 31 December 2016). The corresponding expiry dates are as follows:

31 / 12 / 2017 31 / 12 / 2016

2018 1.1 2017 1.0 2019- 2022 0.2 2018- 2021 0.8 Beyond 2022 44.8 Beyond 2021 47.5 Not time limited 128.4 Not time limited 143.1 Total 174.5 Total 192.4 O / w not recognised in the balance sheet (112.0) O / w not recognised in the balance sheet (112.5) Net deferred tax asset 62.5 Net deferred tax asset 79.9

As described in Note 13-i, only deferred tax assets related to tax losses which the Group expects to recover are recognised in the balance sheet. In particular, the Group takes into account any loss carry- forward limitations.

NOTE 8. EQUITY AND EARNINGS PER SHARE

8.1 Equity a) Share capital b) Outstanding securities giving access to the share capital At 31 December 2017, the share capital of Thales parent company, amounts to €637,976,175 and comprises 212,658,725 shares with At 31 December 2017, there are no securities that give access to the a par value of €3, compared with 212,194,766 shares at share capital of the Company, with the exception of the share 31 December 2016. This represents an increase of 463,959 shares subscription options described in Note 9.4. resulting from the exercise of share subscription options.

2017 Registration Document — THALES 63 2017 Financial Information — Consolidated financial statements

c) Treasury shares

Thales parent company held 568,739 of its own shares at 31 December 2017. They are accounted for as a deduction from equity in the amount of €52.5million. In accordance with the authorisations given to the Board of Directors at the Annual General Meeting, the Company carried out the following transactions in 2016 and 2017:

2017 2016

Treasury shares at 1 January 749,559 839,254 Purchases as part of a liquidity agreement 819,512 513,001 Sales as part of a liquidity agreement (743,512) (472,001) Transfer to employees as part of the employee share purchase offering (462,167) (41,714) Delivery of free shares (606,653) (607,381) Market purchases 852,000 575,000 Exercise of share purchase options (40,000) (56,600) Treasury shares at 31 December 568,739 749,559

At 31 December 2017 and 2016, as part of a liquidity agreement managed by Kepler Cheuvreux, the following numbers of shares where held in the liquidity account:

2017 2016

Number of shares at 31 December 126,000 50,000

Value (€ million) 23.2 29.5

d) Translation adjustments

Translation adjustments result from the translation of financial statements of companies whose functional currency is not the euro, offset as applicable by the impact of derivative instruments denominated in foreign currencies to hedge net investments in foreign operations. Translation adjustments are recorded in equity as other comprehensive income, and are subsequently reclassified to income on disposal. They break down as follows:

2017 2016

Translation adjustment at 1 January (110.0) (87.2) Changes in value (113.9) 21.4 Reclassified to profit and loss – (46.8) Gross change (113.9) (25.4) Deferred tax – 1.3 Scope and other 0.2 1.3 Translation adjustment at 31 December (223.7) (110.0)

Of which: Hedge of net investments in foreign operations – –

64 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information e) Reserves for cash flow hedge

The Group uses foreign exchange derivatives to hedge against changes in the value of future cash flows related to commercial cash flows in foreign currencies. In the consolidated financial statements, the effective portion of changes in fair value of these derivatives is recognised directly in equity, until such time as the hedged flows affect profit and loss.

2017 2016

Cash flow hedge at 1 January (250.7) (276.8) Changes in value of derivatives 252.2 17.6 Reclassified to operating (income) / expense 33.2 27.4 Reclassified to income tax (benefit) / expense (14.5) (9.9) 1 Changes in scope and exchange rates – (9.0) Cash flow hedge at 31 December (a) 20.2 (250.7)

(a) A negative balance at closing means that the exchange rates of the derivative instruments documented as hedges are generally less favorable than the exchange rates prevailing at the closing date. f) Parent company dividend distribution

The per share dividend amounted to €1.60 in 2016 and €1.36 in 2015. The Board of Directors decided to propose to shareholders, who will be convened to a General Meeting on 23rd May 2018, the payment of a total amount of €1.75 per share. If approved, the ex-dividend date will be 30 May 2018 and the payment date will be 1 June 2018. The dividend will be paid fully in cash and will amount to €1.30 per share, after deducting the interim dividend of €0.45 per share paid in December 2017. Dividends paid in 2016 and 2017 are described below:

Year Approved by Description Dividend Payment Payment Total per share date method

2017 Board of Directors meeting on 28 September 2017 2017 interim dividend €0.45 12/2017 Cash €95.2 million General Meeting on 17 may 2017 Balance for 2016 €1.20 06/2017 Cash €253.7 million Total dividends paid in 2017 €348.9 million 2016 Board of Directors meeting on 22 September 2016 2016 interim dividend €0.40 12/2016 Cash €84.6 million General Meeting on 18 may 2016 Balance for 2015 €1.01 05/2016 Cash €212.2 million Total dividends paid in 2016 €296.8 million 2015 Board of Directors meeting on 17 September 2015 2015 interim dividend €0.35 12/2015 Cash €73.4 million g) Non-controlling interests

This item principally includes Leonardo’s interest in sub-group Thales Alenia Space (33%), Siemens’ and Philips Medical Systems International’s interest in Trixell SAS (49%) and, up until 29 June 2016, Raytheon’s interest in Thales- Raytheon Systems Company SAS (50%). The individual contributions of these minority shareholders to the Group’s key financial indicators are not material. The cash of these three companies is unrestricted and is exclusively pooled with Thales’ Corporate Treasury department.

8.2 Earnings per share

Basic earnings per share are calculated by dividing the attributable net Diluted earnings per share take into account instruments with a dilutive effect income by the weighted average number of shares outstanding during on earnings per share and exclude non- dilutive instruments. The dilutive the period, excluding treasury shares. effect of share subscription and share purchase options, free share and unit allotments, is calculated using the treasury stock method, taking into account the average share price over the relevant period.

2017 Registration Document — THALES 65 2017 Financial Information — Consolidated financial statements

2017 2016

Numerator (in € millions) Net income attributable to shareholders of the parent company (A) 821.7 946.4

Denominator (in thousands) Average number of shares outstanding (B) 211,661 210,872 Share subscription and share purchase options (a) 596 1,004 Free share and units plans (b) 984 1,432 Diluted average number of shares outstanding (C) 213,241 213,308

Basic earnings per share (in euros) (A)/(B) 3.88 4.49

Diluted earnings per share (in euros) (A)/(C) 3.85 4.44 Average share price €92.14 €77.59

(a) Only option plans with an exercise price that is lower than the average share price are taken into account in the calculation of diluted earnings per share. (b) Performance shares / units are only taken into account when performance targets are achieved (for the portion deliverable in shares).

NOTE 9. EMPLOYEE BENEFITS

9.1 Consolidated headcount

Consolidated headcount includes all employees of fully consolidated companies. It does not include employees of equity affiliates. At end-2017, Thales’ headcount stood at 64,860 versus 63,783 at end- 2016. Headcount includes three- fourth of employment grade of engineer, specialist, manager or equivalent.

9.2 Personnel expenses

2017 2016

Wages and salaries and payroll taxes (a) (6,120.8) (5,875.8) Defined benefit pension expense: current service cost (Note 9.3) (105.0) (92.9) Compensation subject to presence conditions related to business combinations (17.8) (19.0) Share- based payment (Note 9.4) (48.8) (36.9) TOTAL (6,292.4) (6,024.6)

(a) Including profit- sharing, incentive plans and defined contribution pension expenses.

since 2002). These plans do not impose any other obligations on the 9.3 Pensions and other Group except for the payment of contributions: there is no related benefit employee benefits obligation and contributions are expensed in the period they are incurred.

The Group grants its employees post-employment benefits (pensions, Defined benefit plans end- of-career indemnities, medical care, etc.) and other long-term benefits Defined benefit plans relate to different types of advantages: (long- service and jubilee awards, etc.). • pensions and end- of- career indemnities (legal or contractual), and other a) Description of the plans long-term benefits (jubiliee awards, etc.), notably in France. In general, these commitments are not covered by any assets; The Group’s existing plans are either defined contribution plans or supplementary pension schemes, mainly in the United Kingdom defined benefit plans. • where the main scheme, “Thales UK Pension Scheme” provides a pension based on the beneficiary’s average salary, indexed to Defined contribution plans inflation. This plan has been closed to new entrants since 2002, and In certain countries, the Group pays contributions based on salaries to is managed by a trust according to minimum local funding regulations. state organisations in charge of basic pension schemes (e.g., Sécurité The present value of the Group’s obligations and the value of plan assets Sociale or compulsory supplementary schemes ARRCO and AGIRC in are measured independantly. A provision is recognised if the value of France). Beyond these basic pension schemes, Thales also contributes the assets is insufficient to cover the obligations. to other defined contribution plans (e.g., Netherlands and United Kingdom

66 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information b) Provisions recognised in the balance sheet

2017 2016

Provision at 1 January (2,785.8) (2,318.9) Current service cost (income from operations) (105.0) (92.9) Amendments and settlements (non-recurring operating income) (21.2) 0.0 Interest expense (151.4) (182.6) Expected return on plan assets 94.2 122.0 Net interest cost (57.2) (60.6) 1 Pension fund management cost (5.6) (5.2) Actuarial gains and losses on other long- term benefits (2.7) (11.8) Finance costs on pensions and other long-term employee benefits (65.5) (77.6) Total expense for the period (191.7) (170.5) Actuarial gains and losses (other comprehensive income) 49.4 (661.0) Benefits and contributions 202.9 190.1 • of which, deficit payment in the United Kingdom 82.3 88.3 • of which, other benefits and contributions 120.6 101.8 Translation adjustment 55.7 163.2 Changes in scope of consolidation and other (4.8) 11.3 Provision at 31 December (2,674.3) (2,785.8)

Of which: • post- employment benefits (2,468.0) (2,586.9) • other long- term benefits (206.3) (198.9) c) Changes in defined benefit obligations and plans assets

31/12/2017 UK France Other Total

Obligation at 1 January (4,605.7) (1,138.1) (597.3) (6,341.1) Current service cost (24.0) (57.6) (23.4) (105.0) Interest cost (123.7) (16.9) (10.8) (151.4) Plan participant contributions (10.2) – (2.2) (12.4) Amendments / settlements (2.8) (18.4) – (21.2) Experience gains (losses) 20.8 (28.7) 5.4 (2.5) Actuarial gains (losses) / financial assumptions (147.0) (35.5) (5.3) (187.8) Actuarial gains (losses) / demographic assumptions 137.8 – 1.1 138.9 Actuarial gains (losses) on long- term benefits – (1.1) (1.6) (2.7) Benefits paid by plan assets 161.5 2.6 12.7 176.8 Benefits paid by employer 0.5 75.7 18.6 94.8 Changes in scope, exchange rates and other 161.0 5.5 0.1 166.6 Obligation at 31 December (4,431.8) (1,212.5) (602.7) (6,247.0) Plan assets at 1 January 3,246.2 141.5 167.6 3,555.3 Expected return on plan assets 88.2 2.1 3.9 94.2 Employer’s contribution 98.5 4.0 5.6 108.1 Plan participant contributions 10.2 – 2.2 12.4 Amendments / settlements – – – – Benefits paid by plans assets (161.5) (2.6) (12.7) (176.8) Experience gains (losses) 87.0 6.9 6.9 100.8 Changes in scope, exchange rates and other (119.9) (0.1) (1.3) (121.3) Plan assets at 31 December 3,248.7 151.8 172.2 3,572.7 PROVISIONS AT 31 DECEMBER (1,183.1) (1,060.7) (430.5) (2,674.3)

2017 Registration Document — THALES 67 2017 Financial Information — Consolidated financial statements

31/12/2016 UK France Other Total

Obligations at 1 January (4,294.5) (1,042.2) (555.0) (5,891.7) Current service cost (19.9) (51.4) (21.6) (92.9) Interest cost (148.7) (21.4) (12.5) (182.6) Plan participant contribution (11.4) – (1.8) (13.2) Amendments / settlements – – – – Experience gains (losses) 8.1 (11.5) 2.9 (0.5) Actuarial gains (losses) / financial assumptions (1,011.8) (17.3) (28.3) (1,057.4) Actuarial gains (losses) / demographic assumptions 79.7 (56.8) 2.3 25.2 Actuarial gains (losses) on long- term benefits – (10.1) (1.7) (11.8) Benefits paid by plan assets 141.7 2.4 5.1 149.2 Benefits paid by employer 0.5 58.5 18.7 77.7 Changes in scope, exchange rates and other 650.6 11.7 (5.4) 656.9 Obligations at 31 December (4,605.7) (1,138.1) (597.3) (6,341.1) Plan assets at 1 January 3,274.6 139.2 159.0 3,572.8 Expected return on plans assets 115.0 2.9 4.1 122.0 Employer’s contribution 106.1 2.0 4.3 112.4 Plan participant contribution 11.4 – 1.8 13.2 Amendments / settlements – – – – Benefits paid by plan assets (141.7) (2.4) (5.1) (149.2) Experience gains (losses) 371.0 0.0 0.7 371.7 Changes in scope, exchange rates and other (490.2) (0.2) 2.8 (487.6) Plan assets at 31 December 3,246.2 141.5 167.6 3,555.3 PROVISIONS AT 31 DECEMBER (1,359.5) (996.6) (429.7) (2,785.8)

d) Actuarial assumptions used

The actuarial assumptions used are determined according to the economic environment and specific criteria of each country and each system. The most sensitive assumptions are as follows:

2017 UK France 2016 UK France

Inflation rate 3.19% 1.35% Inflation rate 3.22% 1.40% Discount rate 2.60% 1.20% Discount rate 2.79% 1.50% Average duration of the plans 17 years 10 years Average duration of the plans 17 years 10 years

For each country, the discount rates are obtained by reference to the Iboxx Corporate AA index which reflects the rate of return of very high-quality corporate bonds, with maturity dates equivalent to the duration of the plans being measured, and in the same currency. At 31 December 2017, the sensitivity of the net obligation to a change in the discount rate is as follows:

Sensitivity in basis points +0.25% –0.25% +0.50% –0.50% +1% –1% Decrease (increase) in provision (in € millions) 249.6 (265.6) 483.7 (548.7) 910.5 (1,172.9)

In the United Kingdom, a 25-basis- point increase in the inflation rate would lead to a €117.1 million increase in the obligation. Conversely, a 25- basis- point decrease in the inflation rate would give rise to a €135.5 million decrease in the obligation.

e) Allocation and return on plan assets f) Funding

Plan assets generated an actual average return of 5.5% in 2017, Thales is subject to funding obligations in respect of its defined benefit compared with 14% in 2016. At 31 December 2017, the allocation of pension commitments in the United Kingdom. assets, mainly invested in the United Kingdom, breaks down as follows: In accordance with the regulations in force, the level of funding for its pension obligation is remeasured every three years, further to which the 20 17 20 16 suitability of a new funding plan and / or the implementation of guarantees for the plan is decided in consultation with the trustees. The latest measurement, Fixed- rate bonds 34% 32% based on the situation at end-2014, was finalised in September 2016 Index- linked investments 12% 13% and led to an annual contribution of £60 million to the main Thales UK Pension Scheme (£5 million for other schemes). Equities 28% 33% Depending on changes in the degree of deficit which will be determined Alternative liquid investments 10% 8% based on the situation at the end of 2017, future contributions to the main Alternative non- liquid scheme could change from 2018 and increase to £75 milion. investments (property, etc.) 16% 14% TOTAL 100% 100%

68 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Thales (parent company), in support of the contributions made by Thales At 31 December 2017, the balance of these guarantees was UK Ltd to the British pension plans, has also guaranteed the future £825.8 million, partly reduced by any sums paid into the funding plans. liabilities linked to the funding plans for the subsidiaries concerned.

9.4 Share-based payment

At 31 December 2017, the following options, shares and units were • 1,235,940 share units, including 480,150 performance units; outstanding: • 142,180 phantom shares, payable in cash at the end of a four-year • 850 share purchase options with a weighted average exercise vesting period, including 103,390 performance shares. price of €38.50; The terms of these plans are described in the Registration Document • 783,204 share subscription options with a weighted average exercise (see section on share capital and shareholders). 1 price of €34.13, including 155,427 performance shares; The Group also implemented an employee share purchase plan, the terms • 447,860 free shares, including 360,300 performance shares; of which are described as below: a) Outstanding share purchase option plans

Date of Board Exercise Exercise Number of options Options Options Number of options decision period price outstanding at exercised cancelled outstanding at 31 / 12 / 2016 in 2017 in 2017 31/ 12 / 2017

25 / 11 / 2008 from 25/11/2012 to 24/11/2018 €38.50 850 – – 850 04 / 07 / 2007 from 04/07/2011 to 03/07/2017 €44.77 40,000 (40,000) – – b) Outstanding share subscription option plans

Date of Board Exercise Exercise Number of options Options Options Number of options decision period price outstanding at exercised cancelled outstanding at 31 / 12 / 2016 in 2017 in 2017 31/ 12 / 20 17

15 / 09 / 2011 (a) from 15/09/2015 to 14/09/2021 €26.34 126,322 (40,945) – 85,377 23 / 09 / 2010 (a) from 23/09/2014 to 22/09/2020 €26.34 110,150 (40,100) – 70,050 25 / 06 / 2009 from 25/06/2013 to 24/06/2019 €32.88 362,584 (84,342) (5,490) 272,752 01 / 07 / 2008 from 01/07/2012 to 30/06/2018 €38.50 463,237 (96,732) (11,480) 355,025 04 / 07 / 2007 from 04/07/2011 to 03/07/2017 €44.77 258,400 (201,840) (56,560) –

(a) Plans contingent upon the achievement of internal performance targets over the three financial years following the grant date. c) Allotment of free shares

Date of Board Vesting Share price Number of Shares Shares Shares Number of decision period at grant date free shares at allotted cancelled delivered free shares at 31 / 12 / 2016 in 2017 in 2017 in 2017 31/ 12 / 20 17

28 / 09 / 2017 from 28 / 09 / 2017 €94.66 – 212,540 (a) – – 212,540 to 28 / 09 / 2021 27 / 10 / 2016 from 27 / 10 / 2016 €83.10 87,860 – (300) – 87,560 to 27 / 10 / 2020 148,070 (a) – (310) – 147,760 17 / 09 / 2013 from 17 / 09 / 2013 €39.16 397,180 – (9,274) (387,906) – to 17 / 09 / 2017 226,335 (a) – (7,638) (218,697) – 20 / 12 / 2012 from 20 / 12 / 2012 €27.47 50 (b) – – (50) – to 20 / 12 / 2016

(a) Plans contingent upon the achievement of internal performance targets over the three financial years following the grant date. (b) Adjustment after 2016.

2017 Registration Document — THALES 69 2017 Financial Information — Consolidated financial statements

d) Allotment of share units indexed to the value of Thales shares

Date of the Vesting Share price Number of Units Units Number of allocation decision period at grant date units at cancelled delivered units at 31 / 12 /20 16 in 2017 in 2017 31/ 12 / 2017

17 / 09 / 2015 from 17 / 09 / 2015 €61.75 368,350 (b) (9,050) (270) 359,030 to 17/ 09 / 2019 229,200 (a) (7,750) – 221,450 16 / 09 / 2014 from 16 / 09 / 2014 €42.42 405,210 (8,210) (240) 396,760 to 16 / 09 / 2018 268,000 (a) (9,300) – 258,700

(a) Plans contingent upon the achievement of internal performance targets over the three financial years following the grant date. (b) Adjustment of 620 shares after 2016.

e) Allotment of phantom shares indexed to the value of Thales shares

Date of the Vesting Number of Phantom shares Phantom shares Number of allocation decision period phantom shares deliverred in 2017 cancelled in 2017 phantom shares at 31 / 12 / 2016 at 31 / 12 / 2017

28 / 09 / 2017 from 28 / 09 / 2017 to 28 / 09 / 2021 – 67,140 (a) (140) 67,000 27 / 10 / 2016 from 27 / 10 / 2016 39,430 – (640) 38,790 to 27 / 10 / 2020 37,910 (a) – (1,520) 36,390

(a) Plans contingent upon the achievement of internal performance targets over the three financial years following the grant date.

f) Employee share purchase plan In the consolidated financial statements, the cost of this plan is measured according to the French CNC (Conseil National de la Comptabilité) Following the decision of the Board of Directors on 27 February 2017, recommendation, taking the five- year lock- up period into account. the Group implemented a Thales share purchase plan reserved to its This approach measures the share according to a replication strategy in employees with a discount compared to the average market price plus which the market participant would sell the share at the end of the an employer contribution. five-year lockup period and would borrow the necessary amount to immediately buy a free share by financing the loan by the future sale The subscription price of €75.93, set on 12 October 2017, corresponds and dividends paid out during the lock- up period. to the average of the opening price of Thales shares on Euronext Paris over the twenty trading days preceding this date, discounted by 20%. Accounting cost: hypothesis taken The employees also received an employer contribution corresponding to one free share for four acquired shares up to 40 shares purchased, Five- year free risk interest rate 0.18% within the limit of 10 matching shares. Spread of the banking system (retail) 5.00% This plan is part of the Group savings plan, subject to a five- year lockup Financing rate for an employee 5.18% period of the investment, except for the United Kingdom where the share offering is implemented in accordance with the Share Incentive Plan (“SIP”). Cost of security loan (repo) 1.0% Thus, in 2017, 377,989 shares were subscribed by employees at the Cost for the Group (M€) €6.0 M (a) subscription price of €75.93 and 84,178 bonus shares were received. The delivery of shares to UK based employees will be finalised in (a) Before social contributions (€1.8 million) and administrative charges. early 2018.

70 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information g) Expenses related to share based payment

In the consolidated financial statements, the benefit granted to beneficiaries of the above-mentioned plans is recognised as an operating expense. These amounts break down as follows:

Plans Residual fair 2017 2016 value at the expense expense end of 2017

Free shares 27.0 (8.8) (9.9) Share units (a) 23.3 (20.7) (19.0) Phantom shares and others (b) 9.6 (2.0) (0.3) 1 Employee share scheme – (6.0) – Social contributions related to the plans 15.4 (11.3) (7.7) TOTAL 75.3 (48.8) (36.9)

Of which, offsetting entries: • Shareholders equity 21.8 16.6 • Debt 27.0 20.3

(a) The fair value of the plan, measured in accordance with the Monte Carlo model, takes into account the following assumptions respectively in 2014 and 2015: volatility rates of 22% and 23%, dividend payout rates of 2.7% and 2%, and free risk rates of 0.14% and 0.10%. (b) In 2017, this line included the expense relating to the long-term incentive plan (LTIP) of the Chairman and CEO, consisting of a maximum of 5,000 performance units, the conditions of which are described in the 2016 Registration Document on page 153.

9.5 Compensation of directors and senior corporate officers

Expenses recognised in respect of compensation, benefits and social security contributions attributed to Directors and members of the Executive Committee are as follows:

2017 2016

Short-term benefits: • Fixed compensation 5.2 4.8 • Variable compensation 4.5 3.9 • Retirement benefit 0.5 – • Employer social security contributions 3.3 2.9 • Attendance fees 0.6 0.5

Other benefits: • Post- employment benefits 2.4 1.7 • Share- based payments 2.4 2.5

NOTE 10. CURRENT OPERATING ASSETS AND LIABILITIES

Current operating assets and liabilities include working capital derecognised receivables amounted to €292.5million (€143.5 million components and reserves for contingencies. The changes in these items at 31 December 2016). The organic change in derecognised receivables are presented below. represents an increase of €149 million for 2017 (a decrease of €39.7 million in 2016). Contracts falling within the scope of IAS 11 are subject to specific classification in the consolidated balance sheet: for each contract, the As these assignements without recourse in case of default by the debtor balance of unbilled receivables, work in progress and reserves for involve the transfer of substantially all corresponding risks and rewards, contingencies are presented in assets or liabilities under “Construction they are derecognised. Thales’ continued involvement (within the meaning contracts” (Note 13- c). of IFRS 7) in the related risks and rewards corresponds to the share of dilution risk not transferred to the bank and the remuneration received The Group is authorised to assign trade receivables, mainly from under the recovery mandate. the French State, and commercial paper. At 31 December 2017,

2017 Registration Document — THALES 71 2017 Financial Information — Consolidated financial statements

10.1 Change in current operating assets and liabilities

01 / 01 / 2016 Change in Change 31/ 12 / 2016 Change in Change 31/ 12 / 2017 WCR and in scope, WCR and in scope, reserves exchange reserves exchange rates and rates and reclassifications reclassifications

Inventories and work in progress 2,560.8 177.4 (3.6) 2,734.6 126.6 (57.8) 2,803.4 Construction contracts: assets 2,042.6 285.2 3.7 2,331.5 40.8 (66.3) 2,306.0 Advances to suppliers 383.0 (32.4) (2.3) 348.3 110.3 (6.8) 451.8 Accounts, notes and other receivables 4,404.2 223.3 (80.0) 4,547.5 (103.1) (93.3) 4,351.1 Current derivatives – assets 154.2 18.0 (10.5) 161.7 122.6 (29.9) 254.4 Current operating assets 9,544.8 671.5 (92.7) 10,123.6 297.2 (254.1) 10,166.7 Advances received from customers on contracts (a) (4,317.2) (193.0) 31.8 (4,478.4) 251.3 64.5 (4,162.6) Refundable grants (127.6) (6.6) 0.8 (133.4) 5.0 0.7 (127.7) Construction contracts: liabilities (1,021.0) (116.8) (1.6) (1,139.4) (156.2) 17.3 (1,278.3) Reserve for contingencies (1,022.9) 5.6 (19.7) (1,037.0) (117.1) 19.4 (1,134.7) Accounts, notes and other payables (5,547.6) (310.7) (14.3) (5,872.6) (475.7) 84.0 (6,264.3) Current derivatives – liabilities (405.3) 21.0 (94.0) (478.3) – 298.6 (179.7) Current operating liabilities (12,441.6) (600.5) (97.0) (13,139.1) (492.7) 484.5 (13,147.3) Restructuring provision (b) 116.3 (7.4) 5.4 114.3 (27.0) (1.3) 86.0 INCREASE (DECREASE) IN WCR AND RESERVES FOR CONTINGENCIES 63.4 (222.5)

(a) Advances received on construction contracts respectively amount to €3,262.8 million, €3,302.7 million and €3,024.1 million at 1 January 2016, 31 December 2016 and 2017. (b) Included in reserves for contingencies.

10.2 Reserves for contingencies (excluding construction contracts)

31 / 12 / 2016 Additions Utilisation Reversal Exchange rates 31/ 12 / 2017 (surplus) and other

Restructuring (a) 114.3 42.8 (62.8) (7.0) (1.3) 86.0 Litigation 125.5 84.4 (21.2) (29.2) (1.0) 158.5 Guarantees 255.8 120.1 (40.4) (12.9) 1.8 324.4 Losses at completion 96.3 55.9 (43.0) (11.5) (10.9) 86.8 Provisions on contracts 173.5 40.0 (32.5) (8.8) 8.4 180.6 Other (b) 271.6 112.9 (68.7) (13.4) (4.0) 298.4 TOTAL 1,037.0 456.1 (268.6) (82.8) (7.0) 1,134.7

72 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

01/01 / 2016 Additions Utilisation Reversal Exchange rates 31/ 12 / 2016 (surplus) and other

Restructuring (a) 116.3 72.4 (68.1) (11.7) 5.4 114.3 Litigation 127.7 33.4 (18.9) (24.4) 7.7 125.5 Guarantees 239.7 82.2 (51.8) (10.4) (3.9) 255.8 Losses at completion 76.1 52.9 (27.9) (4.8) – 96.3 Provisions on contracts 147.4 44.9 (12.7) (4.8) (1.3) 173.5 Other (b) 315.7 71.1 (58.4) (23.0) (33.8) 271.6 TOTAL 1,022.9 356.9 (237.8) (79.1) (25.9) 1,037.0 1

(a) Net restructuring costs break down as follows:

2017 2016

Additions for the period (42.8) (72.4) Reversals for the period 69.8 79.8 Expenses for the period (108.1) (107.9) Restructuring costs, net (81.1) (100.5)

(b) Includes technical provisions of insurance companies, provisions for tax and labour- related risks, vendor warranties, environmental guarantees and other.

10.3 Maturity of current receivables and payable

The amounts presented in the balance sheet for this item break down as follows:

31 / 12 / 2017 31 / 12 / 2016

Total < 1 year > 1 year Total

Accounts and accrued receivables, gross 3,217.3 3,139.0 78.3 3,357.0 Provisions on accounts and notes receivable (a) (91.6) (53.4) (38.2) (94.8) Accounts and accrued receivables, net 3,125.7 3,085.6 40.1 3,262.2 Tax receivables (excluding income tax) 893.1 753.2 139.9 966.0 Other receivables, gross 335.2 313.1 22.1 319.3 Provisions for other receivables (2.9) (2.9) – – Net 1,225.4 1,063.4 162.0 1,285.3 Accounts, notes and other receivables 4,351.1 4,149.0 202.1 4,547.5 Accounts and notes payable 2,652.6 2,645.5 7.1 2,467.0 Accrued holiday pay and payroll taxes 1,564.4 1,541.1 23.3 1,455.6 Tax payables (excluding income tax) 698.6 698.1 0.5 679.0 Other creditors and accrued liabilities 1,348.7 1,260.5 88.2 1,271.0 Accounts, notes and other payables 6,264.3 6,145.2 119.1 5,872.6

(a) In 2017, additions to provisions for bad debts, net of reversals of surplus provision, amounted to €6.5 million (€2.1 million in 2016).

intermediary, in order to cover the payment of damages to the customer 10.4 Bonds and warranties in the event that the Group does not meet its contractual commitments. linked to commercial At 31 December 2017, performance bonds amounted to €1,812.5 million contracts (€2,288.6 million at 31 December 2016). Technical, operational and financial costs incurred by the Group in In the ordinary course of its activities, the Group regularly responds to order to meet its obligations are valued, on a contract-by- contract invitations to tender. When requested by the customer, bid bonds are basis, and are included in the cost to completion of the contract. Where delivered in order to demonstrate the definitive nature of the bid and this is not the case, a provision is set aside in the consolidated financial to indemnify the customer if the Group fails to meet its commitments. statements for any potential risk, estimated on a contract- by- contract basis. At 31 December 2017, bid bonds issued amounted to €33.6 million In order to finance contract execution, the Group may receive advance (€26.2 million at 31 December 2016). payments from its customers, in accordance with contractual terms, which From the signature of a contract up until its completion, the Group may are recognised in liabilities in the balance sheet. In order to guarantee also issue performance bonds for its customers, with a bank acting as an reimbursement of these advance payments if the contractual obligations

2017 Registration Document — THALES 73 2017 Financial Information — Consolidated financial statements

are not met, the Group may deliver, at the customer’s request, an the contractual warranty period. In most cases, the provisional advance payment bond. At 31 December 2017, advance payment bonds withholding of payment contractually applying during this period can amounted to €2,143.2million (€2,336.7 million at 31 December 2016). be replaced by a warranty retention bond using a bank as intermediary. At 31 December 2017, warranty retention bonds amount to €90.4million The Group evaluates and sets aside provisions for warranty costs in (€114.9 million at 31 December 2016). order to guarantee the conformity of goods sold to the customer during

The maturity dates of these commitments are:

< 1 year 1 to 5 years > 5 years 31 / 12 / 2017 31 / 12 / 2016

Bid bonds 32.0 1.3 0.3 33.6 26.2 Performance bonds 741.8 832.4 238.3 1,812.5 2,288.6 Advance payment bonds 1,094.4 824.3 224.5 2,143.2 2,336.7 Warranty retention bonds 66.1 17.9 6.4 90.4 114.9 Other bank bonds 55.9 56.7 69.9 182.5 163.2 TOTAL 1,990.2 1,732.6 539.4 4,262.2 4,929.6

The awarding of major contracts, particularly within the defence sector, Parent company guarantees may be subject to local or regulatory offsetting obligations, which can In addition, Thales may grant parent company guarantees to third take the form of direct offsetting, semi-direct offsetting or indirect parties on behalf of its subsidiaries without using a bank as an offsetting. The associated risks are described under “risk factors” in the intermediary. At 31 December 2017, these guarantees amounted to management report. €12,760.4million (€13,697.1 million at 31 December 2016). These guarantees include all commitments given on behalf of Thales Alenia Space, which are backed by a counterguarantee from Leonardo in proportion to its interest in the capital of Thales Alenia Space (33%).

NOTE 11. LITIGATION

Due to the nature of its business activities, Thales is exposed to the risk As a result of this arbitration award, which pertains to a contract signed of technical and commercial litigation. in 1992, the manufacturers were ordered to pay a total sum of €227 million including interest, of which €64 million was payable by To prevent disputes or limit their impact, Thales’ policy is to systematically Thales Systèmes Aéroportés. The corresponding charge was recognised seek alternative dispute resolution mechanisms. This policy is reviewed under “Disposal of assets, changes in scope of consolidation and other” on a regular basis to take into account changes in the Group’s core in the financial statements as at 31 December 2017 (see Note 3.2). areas of business and is backed by employee training programmes. There are no other government, judicial or arbitration claims of which In addition, Thales implemented a procedure several years ago to the Group is aware, which are pending or threatened and which could centralise all civil commercial and criminal litigation and claims. These have or have had, any significant effect on the financial position or are handled by the Corporate Legal Affairs department, with the profitability of the Company and / or the Group in the last 12 months. support of the Group companies involved. In October 2017, Thales was notified of an arbitration award in a commercial dispute between the Republic of China and a group of three French manufacturers, including Thales Systèmes Aéroportés, a Thales subsidiary.

NOTE 12. SUBSEQUENT EVENTS

To the best of the Group’s knowledge, no significant events occurred after the end of the reporting period.

74 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

NOTE 13. ACCOUNTING POLICIES

a) Presentation of the financial statements • amortisation of acquired intangible assets (PPA); other expenses recognised in current operationnal result that are directly Consolidated profit and loss account • related to business combinations, and which are unusual by nature; Expenses in the income statement are presented analytically by destination. • disposal of assets, changes in scope of consolidation and other; Income from operations is equal to income of operating activities before • changes in the fair value of derivative foreign exchange instruments, taking into account: recognised in “Other financial income”; • gains and losses on disposal of disposals of property, plant and • actuarial gains and losses on long- term employee benefits, included equipment and intangible assets, businesses or investments; in “financial income on pensions and other employee benefits”. 1 the impact of changes in scope on consolidated net income (Note 13-b); • Adjusted net income per share corresponds to the adjusted net • the impact of the amendment, curtailment or liquidation of pension plans income attributable to shareholders of the parent company, divided by the and other long- term benefits; average number of shares outstanding during the period concerned. the impairment of non- current operating assets; • Off- balance sheet commitments other operating income (expense) resulting from events that are unusual • Disclosures regarding off- balance sheet commitments are presented in by their frequency, nature and amount. the following notes: Consolidated balance sheet • Note 4.3: lease commitments; Note 9.3- f: funding obligations in respect of pensions; A significant portion of the Group’s activities in its different business • Note 10.4: commercial contract commitments. segments have long- term operating cycles. Accordingly, assets (liabilities) • that are usually realised (settled) within the entities’ operating cycles Related parties (inventory, accounts receivable and payable, advances, reserves, etc.) are classified in the consolidated balance sheet as current assets and The Group has identified the following related parties: shareholders of liabilities, with no distinction between the amounts due within one year Thales SA (parent company), notably the French State and Dassault and those due after one year. Aviation, companies controlled by these shareholders, companies under joint control or significant influence, Directors and Senior Corporate Officers. Consolidated statement of cash flows Section 4.3.3.3 of the 2017 Registration Document describes the main The statement of cash flows provides an analysis of the change in cash provisions concerning the shareholders’ agreement governing relations and cash equivalents, as presented in the balance sheet and defined in between the French State (“public sector”) and Dassault Aviation (“Industrial Note 13-h. The statement of cash flows is prepared using the indirect Partner”) within Thales, the convention on the protection of national strategic method based on consolidated net income and is broken down into interests and the specific convention binding the State and Thales. three categories: Information related to transactions with related parties is presented in the • net cash flow from operating activities (including interest and taxes); following notes: • net cash flow used in investing activities, including net operating • sales with the French State (mainly with DGA: French defence investments (acquisition and disposal of property, plant and procurement agency) in Note 6; equipment and intangible assets, capitalisation of development transactions with companies under joint control and their joint shareholders costs) and net financial investments; • in Note 5.1- e. net cash flow used in financing activities including dividends paid, • Transactions with other related parties are not material. from capital subscriptions (exercise of options by employees), the purchase/ sale of treasury shares, the issuance and repayment of Expenses recognised in respect of compensation, benefits and social debt, and changes in bank overdrafts, etc. security contributions attributable to Directors and members of the Executive Committee are presented in Note 9.5. The Group also presents the changes in its net cash, which is a non- GAAP measure and includes gross debt, net of cash and cash equivalents and b) Scope of consolidation and changes in scope liquid investments. Changes in net cash, presented in Note 6.4, notably reflect Free operating cash flow, defined as net cash flow from Scope of consolidation operating activites less net operating investments, plus the payment of the UK pension deficits. The financial statements of material subsidiaries directly or indirectly controlled by Thales are fully consolidated. The financial statements of Adjusted net income material subsidiaries jointly controlled by Thales (Joint Ventures) or in which the Group has significant influence (associates) are accounted for In order to monitor and compare its operating and financial performances, under the equity method. the Group presents the following key indicators: The main consolidated companies are listed in Note 16. EBIT, corresponding to income from operations plus the share in net income of equity affiliates minus the amortisation of acquired intangible The full list of affiliates outside of France is available on the Group’s website assets (purchase price allocation – PPA) recorded when significant (https://www.thalesgroup.com/en/corporate-responsibility#documents). businesses are combined. From 1 January 2016, it also excludes the other expenses recognised in current operationnal result that are directly Business combinations related to business combinations, and which are unusual by nature. Business combinations are accounted for under the acquisition method Adjusted net income is regarded as pertinent by the Group as it excludes as described in IFRS 3. Under this method, the Group recognises identifiable non- recurring items. It corresponds to consolidated net income attributable assets acquired and liabilities assumed at fair value on their acquisition to shareholders of the parent company, less the following items, net of date. It also recognises non- controlling interests in an acquiree on their the corresponding tax impacts: acquisition date

2017 Registration Document — THALES 75 2017 Financial Information — Consolidated financial statements

Non-controlling interests are measured either at fair value or proportionate Estimates of work remaining on loss-making contracts do not include to the share of the identifiable net assets. This is determined on a sales from claims made by the Group, except when it is highly case- by- case by the Group depending on the option it wishes to apply. probable that such claims will be accepted by the customer. Acquisition- related costs (valuation fees, consulting fees, etc.) are Progress payments received on construction contracts are deducted recognised under “other operating expenses” as incurred. from contract assets as the contract is completed. Progress payments received before the corresponding work has been performed are Negative goodwill is immediately recognised in “other operating classified in “advances received from customers on contracts” in income (expenses)”. Positive goodwill related to controlled companies balance sheet liabilities. is recognised in balance sheet assets under intangible assets. Positive goodwill related to equity affiliates is recognised under “share in net The cumulative amount of costs incurred and profit recognised, less any assets of equity affiliates”. recognised losses and progress billings, is determined on a contract- by-contract basis. If this amount is positive, it is recognised Goodwill is not amortised but is subject to impairment tests each year. under “Construction contracts: assets” in the balance sheet. If it is Goodwill impairment is booked as an expense under “impairment of negative, it is recognised under “Construction contracts: liabilities”. non-current operating assets” and may not be reversed. Goodwill impairment related to equity affiliates is recognised in “share in net income d) Inventories and work in progress of equity affiliates” and may be reversed.

c) Revenue recognition In the consolidated balance sheet, work in progress related to construction contracts is included under “Construction contracts: assets” or “Construction contracts: liabilities”. The Group’s sales can be divided into two main accounting categories: sales of goods and services, and construction contracts. Inventories and work in progress are carried at their production cost (determined using the FIFO or weighted-average cost method) and Sales are measured at the fair value of the consideration received or written down when production cost exceeds their net realisable value. receivable. When the deferral of payment has a material effect on the Work in progress, semi- finished and finished goods are stated at dire determination of fair value, the amount at which sales are recognised is ct cost of raw materials, production labour and subcontractor costs adjusted to take the financial impact of the deferral of payment into account. incurred during production, plus an appropriate portion of production overheads and any other costs that can be directly allocated to Sales of goods and services contracts. Income from the sales of goods and services together with royalty and When material, the cost of debt incurred during the construction of a licence income are recognised when future economic benefits are likely qualifying asset is incorporated in the value of the asset. When the to flow to the Group and when the amount of sales can be measured funding is specific, the loan interest rate is used, otherwise the Group’s reliably. The following specific criteria must also be satisfied in order for financing rate is used. sales to be recognised: • income from the sale of goods is recognised when the Company e) Research and development expenses has transferred the principal risks and rewards inherent to ownership of the goods to the purchaser; A significant share of research and development expenses is funded by customers and government agencies. Internally funded research and income from services rendered is recognised according to the • development expenses are charged to the profit and loss account as percentage- of- completion method. incurred, except for project development costs which meet the criteria The costs related to the service provided (sale of goods or services below. In this case, the development costs are capitalised in balance rendered) are recognised in the statement of income at the same time sheet assets: as the corresponding sales. • the product or process is clearly defined, and costs are separately identified and reliably measured; Construction contracts the technical feasibility of the product or project is clearly A construction contract is a contract specifically negotiated for the • demonstrated, and the Group’s experience in this area is established; construction of an asset or group of assets that are closely linked or interrelated in terms of their design, technology, function, purpose or use. • adequate resources are available to complete the project successfully; According to its characteristics, a notified construction contract can • a potential market for the products exists or their usefulness, in case either be accounted for separately, be segmented into several components of internal use, is demonstrated; which are each accounted for separately, or be combined with another the Company intends to produce and market, or use the new construction contract in progress in order to form the scope of the • product or process, and can demonstrate its profitability. Profitability contract for accounting purposes in respect of which sales and expenses is assessed on the basis of prudent commercial assumptions in order will be recognised. to reflect contingencies inherent to the long cycles of the Group’s Sales and expenses on construction contracts are recognised in activities, in particular Aerospace. Minimum internal rates of return accordance with the technical percentage- of-completion method. are required in the case of projects deemed risky. However, when there is no significant time difference between technical Capitalised development costs mainly relate to the Group’s Aerospace percentage of completion and contractual dates of transfer of ownership, and Security activities, for which the products developed are relatively the percentage of completion is determined according to the contractual generic and can be sold to a larger number of potential customers. transfer of ownership. By contrast, development costs linked to Defence activities are for more Penalties for late payment or the improper execution of a contract are specific and restricted markets with a more limited number of players: the recognised as a deduction from sales. In the balance sheet, provisions specific features of the products developed make it harder to share for penalties are deducted from assets related to the contract. development work and therefore harder to capitalise the associated costs. Expected losses on contracts are fully recognised as soon as they are Development costs are then amortised over the useful life of the product. identified. The method of amortisation is generally determined by reference to expected future quantities over the period in which future economic Selling, administrative and interest expenses are directly charged to the benefits will be earned. If the method cannot be determined reliably, profit and loss account in the period in which they are incurred. linear amortisation is adopted. The period of amortisation depends on the type of activity.

76 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

Assets are also subjected to impairment loss tests. The terms and • Investments are designated as “available for sale” assets and measured assumptions taken into account to conduct these tests are described in at fair value. The fair value corresponds to the market price for Note 4. These impairment losses can be reversed. Impairment loss shares quoted on a regulated market. For other shares, the fair value reversal criteria are identical to those retained when first capitalising is usually determined using valuation models provided by independent development costs on a new project. third parties, or by reference to the share in net equity held by the Group. Changes in fair value are recognised directly in equity. If an The Group receives tax credits related to research carried out by its impairment indicator is identified, impairment is recognised in “other subsidiaries. These tax credits are considered as operating grants and financial income (expense)”. Such impairments are only written back are therefore included in income from operations, when their award is to profit and loss at the date of disposal of the security in question. not dependent on the generation of taxable income. Otherwise, they are recognised as a deduction from income tax expense. • Receivables and financial loans are recognised at amortised cost. They are subject to impairment if an impairment indicator is f) Restructuring costs identified. Such impairment, recognised in “other financial income (expense)”, may subsequently be reversed through profit and loss if 1 Provisions for restructuring costs are set aside when restructuring programs the conditions which led to the impairment loss being recognised have been agreed and approved by Group management and have cease to exist. been announced before the balance sheet date, resulting in an obligating • Deposits that Thales intends to hold until maturity are recognised at event of the Group to the third parties in question, as long as the Group amortised cost. does not expect consideration for these costs. • Other financial assets are estimated at fair value, with changes in Such costs primarily relate to severance payments, costs for notice fair value recognised in profit and loss. They include money market periods not worked and other costs linked to the closure of facilities funds and other mutual funds, and interest rate products (certificates such as write- offs of fixed assets. These costs and the costs directly of deposit, term deposits, medium- term negotiable notes, etc.). linked to restructuring measures (removal costs, training costs of transferred employees, etc.) are recognised under “restructuring costs” in the profit • ”Cash and cash equivalents” includes cash at bank and in hand as and loss account. well as cash equivalents (short- term and liquid investments that are easily converted into a known amount of cash and exposed to g) Property, plant and equipment negligible risk of a change in value). and intangible assets Financial liabilities Intangible assets Borrowings and other financial liabilities are measured at amortised The Group’s intangible assets mainly include: cost using the effective interest rate. Upon initial recognition, premiums, redemption and issuance costs are included in the calculation of the goodwill (Note 13- b); • effective interest rate and are recognised in the profit and loss account • assets acquired in business combinations, primarily acquired on an actuarial basis over the life of the loan. technologies, customer relationships and the order backlog. These assets are recognised at fair value and amortised over their useful Derivatives lives. The fair value of the assets is based on the market value. If no The Group uses financial instruments to manage and reduce its exposure active market exists, the Group uses methods based on forecasts of to risks of changes in interest rates and foreign exchange rates. the present value of the expected future operating cash flows (excess earnings method, royalty method, etc.); Foreign exchange derivatives eligible for hedge accounting are accounted for as follows: • capitalised development costs (Note 13- e). the effective portion of the change in fair value of the hedging Intangible assets are submitted to impairment tests. • instrument is recognised directly in equity until such time as the hedged flows affect profit and loss. The ineffective portion is recognised in Property, plant and equipment profit and loss; Property, plant and equipment is stated at cost, net of any accumulated the amount of the foreign currency denominated transaction is depreciation and accumulated impairment losses. Depreciation of • subsequently translated at the exchange rate prevailing at the date property, plant and equipment is generally calculated on the basis of inception of the hedge. of the following typical useful lives: Changes in the fair value of premiums or discounts related to forward 20 years for buildings; • foreign currency contracts, as well as the time value of foreign currency 1 to 10 years for technical facilities and industrial equipment and tooling; • options, are recognised in “other financial income (expense)” as they 5 to 10 years for other property, plant and equipment (vehicles, • are excluded from the hedging relationship. fixtures, etc.). Interest- rate derivatives are used either as fair value hedges or cash The depreciable amount takes into account the residual value of the flow hedges: asset. The different components of property, plant and equipment are recognised separately when their estimated useful lives or patterns of • a fair value hedge is a hedge of the exposure to changes in the use, and thus the period over which they are depreciated or the value of assets and liabilities; depreciation methods applicable to them, are materially different. • a cash flow hedge is a hedge of the exposure to changes in the Borrowing costs that are directly attributable to the acquisition or construction value of future cash flows (unknown future interest flows payable on of an asset are capitalised as part of the cost of that asset. existing variable- rate borrowings or on highly probable future borrowing issues, for example). h) Financial assets, financial liabilities and derivatives In the case of fair value hedge relationships, particularly for the portion of fixed-rate bond debt swapped for a variable rate, the financial liabilities hedged by the interest-rate derivatives are remeasured to the Financial assets extent of risk hedged. Changes in the value of hedged items are Financial assets are initially recorded at fair value. They are subsequently recognised in profit and loss for the period and are offset by symmetrical measured at either fair value or amortised cost, depending on the adjustments in interest- rate derivatives. category they fall into, as defined by IAS 39.

2017 Registration Document — THALES 77 2017 Financial Information — Consolidated financial statements

In the case of cash flow hedging relationships, the effective portion of The fair value of the services received is calculated by reference to the changes in fair value of interest- rate derivatives shown in the balance fair value of the shares at the grant date, less the present value of sheet is recognised directly in equity until such time as the hedged flows dividends forfeited by employees during the vesting period, taking into affect profit and loss. account the presence conditions.

i) Deferred taxation Internal performance conditions are taken into account only by means of an adjustment in the projected number of instruments acquired by employees at the end of the vesting period. Therefore, they are not Thales recognises deferred taxes when the tax value of an asset or taken into account in the fair value estimate of the instruments granted, liability differs from its book value. which is determined at the grant date. Deferred tax assets are not recognised in the balance sheet if the The expense related to these plans is included in the current operating company concerned does not reasonably expect to recover the tax income with the consolidated reserves account as counterpart without asset. To assess its ability to recover deferred tax assets, the Group impact on total equity. As the payment of compensation is subject takes into account forecast taxable income of the tax entities concerned, to presence conditions, the corresponding expense is recorded over the generally over a five- year time- frame, non- recurring past events and tax vesting period on a straight-line basis. When appropriate, the expense strategies specific to each country. is adjusted over the vesting period to reflect any losses of rights. j) Pensions and other long-term employee benefits Share unit plans indexed to the value of the Thales share The Group’s defined benefit plan commitments are measured by independent actuaries using the projected unit credit method on the A share unit plan indexed to the value of Thales shares, some of which basis of estimated salaries at the date of retirement. The calculations are performance shares, was implemented in 2014 and in 2015. mainly take into account assumptions concerning discounting as well as At the maturity date, the beneficiaries will receive the value, about half inflation, mortality and staff turnover rates, etc. of which is in the form of shares and half in the form of cash-settled share- based payment. Changes in actuarial assumptions and experience adjustments – corresponding to the effects of differences between previous actuarial The proportion delivered in shares follows the same accounting policies assumptions and what has actually occurred – give rise to actuarial as those applied to free share plans. The accounting treatment gains and losses: applicable to cash-settled share-based payments is governed by IFRS 2. Under this policy, the services acquired and the liability incurred actuarial gains and losses on post-employment benefits are • are measured at fair value. Until the liability is settled, debt is recognised in full within other comprehensive income, and are not remeasured at each reporting date, with any changes in fair value subsequently reclassfied to profit and loss. Where appropriate, the recognised in income for the period. The remeasurement of the liability same treatment is applied to adjustments linked to the ceiling on net at the reporting date takes into account any changes in the value of the assets for plans in surplus; underlying shares, as well as whether or not the presence conditions • actuarial gains and losses on other long- term benefits are recognised and performance criteria have been met. immediately in financial income (Note 9.3). Phantom shares Past service cost, measured in cases of amendments or curtailments of plans, and plan settlements are recognised in full within non-recurring Since this is a cash-settled plan, IFRS 2 requires an evaluation of vested operating income in the period in which it is incurred. services and the liability assumed at fair value. Until the payment of the liability, the debt is remeasured at the closing date and taken to profit Net interest expense, determined based on the discount rate of and loss. The remeasurement of the debt takes into account the obligations, is recognised in financial income. achievement of performance and/ or presence conditions, as well as k) Share-based payment the change in value of the underlying shares. Company savings plans Free share plans Employee share offerings with a discount to the market price proposed Between 2007 and 2013, and then again in 2016 and 2017, Thales within Company savings plans do not include any vesting period for granted free shares and/ or performance shares to its employees. These rights but are subject to a legal five-year lock-up period. The allotments give rise to an expense representing the fair value of services measurement of the advantages granted to employees takes into received at the grant date. This payroll expense is recognised against equity. account the cost of the five- year lock- up period.

78 THALES — 2017 Registration Document Consolidated financial statements — 2017 Financial Information

NOTE 14. FEES PAID TO STATUTORY AUDITORS

The amounts of fees paid to the statutory auditors of Thales SA (parent company) and their networks recognised in profit and loss for 2016 and 2017 are presented below: Other Services cover services required by law (e.g. interim dividend, capital increase) and other services compatible with the statutory auditor’s role (certification of expenditures, agreed engagements, services of a tax- related nature without material impact, etc.).

(in € thousands) Mazars Ernst & Young Audit Total

2017 2016 2017 2016 2017 20 16

Certification of accounts 6,221 5,427 5,052 4,627 11,273 10,054 • Issuer 927 779 920 856 1,847 1,635 1 • Subsidiaries 5,294 4,648 4,132 3,771 9,426 8,419 Other services 690 526 1,030 791 1,720 1,317 • Issuer 197 190 193 31 390 221 • Subsidiaries 493 336 837 760 1,330 1,096 TOTAL 6,911 5,953 6,082 5,418 12,993 11,371

NOTE 15. OTHER DISCLOSURES

The German group company Electronic Signalling Services (ESS) GmbH, located at 1 Thalesplatz, 71254 Ditzingen has claimed an exemption from their obligation to publish their respective German financial statements for the fiscal year 2017 by reference to Section 264 paragraph 3 of the German Commercial code.

NOTE 16. LIST OF MAIN CONSOLIDATED COMPANIES (excluding Thales SA, the parent company)

Company name Country % interest % interest 31/12/2017 31/12/2016 1. Consolidated subsdiaries (a) TDA Armements SAS (b) France – 100% Thales Alenia Space SAS France 67% 67% Thales Alenia Space Italia SpA Italy 67% 67% Thales Air Operations SAS France – 100% Thales Australia Ltd Australia 100% 100% Thales Avionics, Inc. United States 100% 100% Thales Avionics Electrical Systems SAS France 100% 100% Thales AVS France SAS (ex Thales Avionics SAS) (b) France 100% 100% Thales Canada Inc. Canada 100% 100% Thales Communications & Security SAS France 100% 100% Thales Defense & Security, Inc. United States 100% 100% Thales Deutschland GmbH (ex Thales Electronic Systems GmbH) (c) Germany 100% 100% Thales DMS France SAS (ex Thales Systèmes Aéroportés SAS) (b) France 100% 100% Thales Electron Devices SAS (b) France – 100% Thales e- Security, Inc United States 100% 100% Thales Espana Grp, S.A.U. Spain 100% 100% Thales Ground Transportation Systems UK Ltd United Kingdom 100% 100% Thales Italia SpA Italy 100% 100% Thales LAS France SAS (ex Thales Air Systems SAS) (b) France 100% 100% Thales Nederland B.V. Netherland 99% 99% Thales Norway AS Norway 100% 100%

2017 Registration Document — THALES 79 2017 Financial Information — Consolidated financial statements

Company name Country % interest % interest 31/12/2017 31/12/2016

Thales Optronique SAS (b) France – 100% Thales Rail Signalling Solutions AG Suitzerland 100% 100% Thales Services SAS France 100% 100% Thales Solutions Asia Pte Ltd Singapor 100% 100% Thales Training & Simulation SAS (b) France – 100% Thales Transportation Systems GmbH (c) Germany – 100% Thales Transport & Security (Hong- Kong) Ltd Hong Kong 100% 100% Thales Transport & Security Ltd United Kingdom 100% 100% Thales Underwater Systems SAS (b) France – 100% Thales UK Ltd United Kingdom 100% 100% Trixell SAS France 51% 51%

2. Joint ventures (equity method) Thales- Raytheon Systems Air and Missile Defense Command and Control SAS France 50% 50% Naval Group France 35% 35% Diehl Aerospace GmbH Germany 49% 49% Sofradir SAS France 50% 50%

3. Associates (equity method) Aviation Communications & Surveillance Systems United States 30% 30% Airtanker Holdings Ltd United Kingdom 13% 13% Elettronica SpA Italy 33% 33% Telespazio SpA Italy 33% 33%

(a) Companies with sales representing more than 0.5% of consolidated sales. (b) In France, as at 31 December 2017, the main transactions carried out were as follows: – Thales Air Systems SAS (now Thales LAS France SAS) absorbed the following companies:TDA Armements SAS, Thales Air Operations SAS, Thales Angénieux SAS, Thales Cryogénie SAS and Thales Optronique SAS, – Thales Avionics SAS (now Thales AVS France SAS) absorbed the following companies: Thales Avionics LCD SAS, Thales Electron Devices SAS and Thales Training & Simulation SAS, – Thales Systems Aéroportés SAS (now Thales DMS France SAS) absorbed the following companies: Thales Microelectronics SAS and Thales Underwater Systems SAS. (c) Thales Transportation Systems GmbH merged into Thales Electronic Systems GmbH and was renamed Thales Deutschland GmbH.

1.2.7 Statutory auditors’ report on the consolidated financial statements

This is a translation into English of the statutory auditors’ report on the consolidated financial statements of the Company issued in French and it is provided solely for the convenience of English-speaking users. This statutory auditors’ report includes information required by European regulation and French law, such as information about the appointment of the statutory auditors or verification of the information concerning the Group presented in the management report. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

To the Annual General Meeting of Thales, Basis for opinion

Opinion • Audit framework In compliance with the engagement entrusted to us by your annual We conducted our audit in accordance with professional standards general meetings, we have audited the accompanying consolidated applicable in France. We believe that the audit evidence we have financial statements of Thales for the year ended December 31, 2017. obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, the consolidated financial statements give a true and fair Our responsibilities under those standards are further described in the view of the assets and liabilities and of the financial position of the Statutory Auditors’ Responsibilities for the Audit of the Consolidated Group as at December 31, 2017 and of the results of its operations for Financial Statements section of our report. the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. • Independence The audit opinion expressed above is consistent with our report to the We conducted our audit engagement in compliance with independence Audit and Accounts Committee. rules applicable to us, for the period from January 1, 2017 to the date of our report and specifically we did not provide any prohibited non-audit services referred to in Article 5 (1) of Regulation (EU) No 537/ 2014 or in the French Code of Ethics (Code de déontologie) for statutory auditors.

80 THALES — Document de référence 2017 Consolidated financial statements — 2017 Financial Information

Justification of assessments – Key audit matters

In accordance with the requirements of Articles L. 823- 9 and R. 823-7 These matters were addressed in the context of our audit of the of the French Commercial Code (Code de commerce) relating to the consolidated financial statements as a whole, and in forming our justification of our assessments, we inform you of the key audit matters opinion thereon, and we do not provide a separate opinion on specific relating to risks of material misstatement that, in our professional items of the consolidated financial statements. judgment, were of most significance in our audit of the consolidated financial statements of the current period, as well as how we addressed those risks.

Recognition of construction contracts

Risk identified Our response 1 A significant part of the Group’s revenue and current operating income Our work notably consisted in: results from construction contracts accounted for using the • evaluating the Group’s systems and procedures for estimating percentage-of- completion method. These contracts are often spread revenue and costs at completion and measuring technical over several years. milestones; Thales determines the revenue and the expenses for construction • reconciling the construction contract management data with the contracts under the conditions described in Note 13-c “Revenue” to the accounting data; consolidated financial statements. • selecting contracts that are significant due to their financial impact The recognition of income and expenses relating to construction and risk profile and interviewing the account managers, the contracts during an accounting closing primarily depends on: managements of the Global Business Units and the executive • estimates of the revenue and margin at completion, and notably the management on the progress made on these contracts and their level of provisions for technical and commercial risks; assessment of the risks in order to: – assess the reflection in the accounts of the contractual clauses; technical milestones reached in the performance of the contracts. • – corroborate the main revenue’s and costs at completion’s For each contract, estimates of costs at completion, as well as the assumptions with the costs incurred to date, the contractual data, achievement of technical milestones, are based on the Group’s internal and correspondence with the client or their representatives. These systems and procedures, notably involving project managers. These procedures take into account the experience gained in previous estimates are reviewed regularly by the managements of the Global years on these contracts or on similar contracts; Business Units and the executive management, particularly at each – assess the consistency of the revenue recognized on the contract closing date. and other items in the income statement and balance sheet in relation to the milestones reached and to the contractual We considered the recognition of construction contracts to be a key conditions. audit matter, in view of the impact of these contracts on the consolidated financial statements of the Group and the level of estimation required by the management to determine results upon completion.

Litigation

Risk identified Our response The Group carries out its activities in France and abroad in legal and With regard to technical and commercial litigation, our work notably regulatory environments that are complex and constantly evolving. consisted in: Therefore, it is exposed to legal, technical and commercial risks. • Evaluated the procedures in force within the Group relating to the The Group’s legal department centralizes and handles, with assistance listing, assessment and reflection in the accounts of civil, commercial from the subsidiaries concerned, all civil, commercial and criminal and criminal litigation and claims and assessing their correct litigation and claims. application via sampling; The assessment of these risks and litigation by the management has • interviewing the Finance department, the Legal Department a Group resulted in the Group recording liabilities and provisions for impairment. Secretary and General Council, as well as the managements of the Note 11 “Litigation” to the consolidated financial statements describes main consolidated entities, on the status of all significant litigation; potential uncertainties relating to significant litigation and their progress. • questioning the Group’s main lawyers to confirm the listing of We considered the listing and evaluation of litigation and the litigation and assess the nature of the related risks and liabilities; associated risks to be a key audit matter in view of the significance of • reading the meetings’ minutes of the Audit and Accounts Committee the estimates made by the management and the potential materiality of and the Board of Directors in order to assess the completeness of the their impact on the Group’s income and shareholders’ equity, should list of significant litigation. these estimates change. Lastly, we considered whether the risks and significant litigation identified during the implementation of these procedures are described appropriately in Note 11 “Litigation” to the consolidated financial statements.

2017 Registration Document — THALES 81 2017 Financial Information — Consolidated financial statements

Implementation of IFRS 15 relating to revenue recognition

Risk identified Our response

IFRS 15, which will be mandatorily applicable for the year beginning Our work consisted in: on January 1, 2018, introduces new criteria for the recognition of • assessing the compliance of the new revenue recognition principles revenue. and methods described in Note 1.2 to the consolidated financial As from the end of 2016, the Group set up a work group to identify statements with IFRS 15; divergences with its current accounting methods. The Group measured • verifying of the quantified impacts presented in the notes to the the accounting impacts by relying on analyses of the contractual or consolidated financial statements concerning the adoption of general conditions applicable to its construction contracts and on a IFRS 15 on shareholders’ equity and the order book as at January 1, simulation tool developed internally by the Group. 2017, as well as on revenue and 2017 profit. For this purpose, we: These differences and the expected impact relating to the Group’s key – selected contracts on the basis of their financial impact and risk figures from January 1 to December 31, 2017 are presented in profile; Note 1.2 to the consolidated financial statements. – assessed the Group’s analyses of these contracts, which allowed it to decide on the transfer of control over time or point in time We considered the adoption of IFRS 15 relating to the recognition of and, where applicable, the identification of the various revenue to be a key audit matter, in view of the differences with the performance obligations. We evaluated the contractual existing principles and methods, notably including the transition from the conditions for termination for convenience, legal memos and technical percentage of completion method to the percentage of margin simulations performed by the Group; completion method expense based in order to recognize the revenue – Evaluated the functioning of the simulation tool developed from contracts which provide for criteria proving the transfer of control internally and reconciled the data used in the tool and in the over time. analyses done by the main subsidiaries with the accounting data. Lastly, we assessed the appropriateness of the qualitative and quantitative information given in Note 1.2 to the consolidated financial statements.

Verification of the Information Pertaining to Statutory Auditors’ Responsibilities for the the Group presented in the management report Audit of the Consolidated Financial Statements As required by law and in accordance with professional standards Objectives and audit approach applicable in Francewe have also verified the information pertaining to • the Group presented in the Board of Directors’s management report. Our role is to issue a report on the consolidated financial statements. Our objective is to obtain reasonable assurance about whether the We have no matters to report as to its fair presentation and its consolidated financial statements as a whole are free from material consistency with the consolidated financial statements. misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Report on other legal and regulatory professional standards will always detect a material misstatement when requirements it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be Appointment of the statutory auditors • expected to influence the economic decisions of users taken on the We were appointed as statutory auditors of Thales by the ordinary and basis of these consolidated financial statements. extraordinary Annual General Meeting held on June 25, 1983 for As specified in Article L. 823-10- 1 of the French Commercial Code MAZARS and on May 15, 2003 for ERNST & YOUNG Audit. (Code de commerce), our statutory audit does not include assurance on As at December 31, 2017, MAZARS was in the 35th year and ERNST & the viability of the Company or the quality of management of the affairs YOUNG Audit in the 15th year of total uninterrupted engagement. of the Company. As part of an audit conducted in accordance with professional Responsibilities of Management standards applicable in France, the statutory auditors exercise and those charged with Governance professional judgment throughout the audit and furthermore: for the Consolidated Financial Statements Identify and assess the risks of material misstatement of the Management is responsible for the preparation and fair presentation of • consolidated financial statements, whether due to fraud or error, the consolidated financial statements in accordance with International design and perform audit procedures responsive to those risks, and Financial Reporting Standards as adopted by the European Union and obtain audit evidence considered to be sufficient and appropriate to for such internal control as management determines is necessary to provide a basis for his opinion. The risk of not detecting a material enable the preparation of consolidated financial statements that are free misstatement resulting from fraud is higher than for one resulting from from material misstatement, whether due to fraud or error. error, as fraud may involve collusion, forgery, intentional omissions, In preparing the consolidated financial statements, management is misrepresentations, or the override of internal control. responsible for assessing the Company’s ability to continue as a going Obtain an understanding of internal control relevant to the audit in concern, disclosing, as applicable, matters related to going concern • order to design audit procedures that are appropriate in the and using the going concern basis of accounting unless it is expected circumstances, but not for the purpose of expressing an opinion on to liquidate the Company or to cease operations. the effectiveness of the internal control. The Audit and Accounts Committee is responsible for monitoring the Evaluate the appropriateness of accounting policies used and the financial reporting process and the effectiveness of internal control and • reasonableness of accounting estimates and related disclosures risks management systems and where applicable, its internal audit, made by management in the consolidated financial statements. regarding the accounting and financial reporting procedures. Assess the appropriateness of management’s use of the going The consolidated financial statements were approved by the Board of • concern basis of accounting and, based on the audit evidence Directors.

82 THALES — Document de référence 2017 Consolidated financial statements — 2017 Financial Information

obtained, whether a material uncertainty exists related to events or • Report to the Audit and Accounts Committee conditions that may cast significant doubt on the Company’s ability We submit a report to the Audit and Accounts Committee which to continue as a going concern. This assessment is based on the includes in particular a description of the scope of the audit and the audit evidence obtained up to the date of his audit report. However, audit program implemented, as well as the results of our audit. We also future events or conditions may cause the Company to cease to report significant deficiencies, if any, in internal control regarding the continue as a going concern. If the statutory auditor concludes that a accounting and financial reporting procedures that we have identified. material uncertainty exists, there is a requirement to draw attention in the audit report to the related disclosures in the consolidated Our report to the Audit and Accounts Committee includes the risks of financial statements or, if such disclosures are not provided or material misstatement that, in our professional judgment, were of most inadequate, to modify the opinion expressed therein. significance in the audit of the consolidated financial statements of the current period and which are therefore the key audit matters that we are Evaluate the overall presentation of the consolidated financial • required to describe in this report. statements and assesses whether these statements represent the underlying transactions and events in a manner that achieves fair We also provide the Audit and Accounts Committee with the 1 presentation. declaration provided for in Article 6 of Regulation (EU) No. 537/ 2014, confirming our independence within the meaning of the rules Obtain sufficient appropriate audit evidence regarding the financial • applicable in France as set out in particular in Articles L. 822-10 to information of the entities or business activities within the Group to L. 822-14 of the French Commercial Code (Code de commerce) and express an opinion on the consolidated financial statements. The in the French Code of Ethics (Code de déontologie) for statutory statutory auditor is responsible for the direction, supervision and auditors. Where appropriate, we discuss with the Audit and Accounts performance of the audit of the consolidated financial statements Committee the risks that may reasonably be thought to bear on our and for the opinion expressed on these consolidated financial independence, and the related safeguards. statements.

Courbevoie and Paris- La Défense, March 5, 2018 The Statutory Auditors (French original signed by) Mazars Ernst & Young Audit Anne-Laure Rousselou Philippe Diu Jean-Marc Deslandes Serge Pottiez

2017 Registration Document — THALES 83 2017 Financial Information — Parent company management report and financial statements

1.3 PARENT COMPANY MANAGEMENT REPORT AND FINANCIAL STATEMENTS

1.3.1 Management report on the parent company financial statements

1.3.1.1 Activities and results 1.3.1.2 Balance sheet at 31 December 2017 Operating income amounted to €741 million, compared with €636 million in 2016. Sales totalled €259 million, compared with The balance sheet total at year- end 2017 was €14,636 million, €233 million in 2016. up €334 million from €14,302 million at year- end 2016. Activities are described by sector in the accompanying notes. The total non- current assets of €9,241 million (€9,002 million in 2016) Revenues mainly consist of rents re-billed to operating subsidiaries and are mainly composed of financial investments. The €211 million sales of research, chiefly conducted by the Central Research and increase in equity investments is mainly due to the acquisition of shares Technology department of Thales Group. The increase in revenues was in Thales Air Systems SAS for €218 million. mainly due to the billing of costs for rehabilitation of the site in Jouy en Other financial investments rose by €36 million, largely as a result of Josas and additional works on the sites in Elancourt and Toulouse Labège. the acquisition of treasury shares. Other operating income amounted to €443 million, compared with Current assets rose €95 million to €5,396 million at end-December 2017. €379 million in 2016. It includes royalties paid by direct operating Cash and cash equivalents increased by €267 million reflecting the subsidiaries, as well as expenses re-billed to those subsidiaries, improved operating cash flow of subsidiaries. The €406 million including for general and specific centralised services provided by the decrease in “Other receivables” was mainly due to foreign exchange parent company, and capitalised production. The main increase adjustments (-€344 million) and a decrease in tax receivables from the corresponds to re- billings in connection with the employee shareholding French government (- €91 million). plan and the delivery of the 2013 free share plan. The €50 million change in “Treasury shares allocated to plans” resulted Net loss from operations amounted to -€ 90 million, compared with mainly from the delivery of shares under the 2013 free share plan for a loss of - €93 million in 2016. - €49 million. Net financial income was €516 million, compared with €464 million Other investments of €325 million correspond to deposits with first-tier in 2016. banks with maturities of 3 to 12 months. Provisions for equity investments and subsidiary risks totalled The balance of Group companies’ current accounts represented net -€42 million in 2017 compared with -€58 million in 2016. Reversals debt of €4,450 million at year-end 2017, compared with of provisions for equity investments and subsidiary risks represented €4,350 million at year- end 2016. €10 million in 2017 compared with €53 million in 2016. “Borrowings” amounted to €1,571 million at year-end 2017, versus Income from investments amounted to €545 million in 2017, versus €1,459 million at year- end 2016. They mainly include bond issues for €496 million in 2016. a total amount €1,400 million, as well as foreign-currency and euro Non-recurring expense amounted to - €53 million, compared with denominated borrowings from Group subsidiaries and associates. -€17 million in 2016. The increase is mainly explained by the At year-end 2017, share capital stood at €638.0 million and total liquidation of Thales Belgium SA in 2017. equity came to €6,882 million, compared with €6,829 million at The Company recorded an income tax benefit of €10 million compared year- end 2016. with €78 million in 2016, due largely to Research Tax Credits. Customer and Supplier payment schedules In 2017, non- deductible expenses pursuant to Articles 223 quater and 39.4 of the French Tax Code amounted to €0.2 million. Thales pays its suppliers 60 days after invoice date, in line with the maximum period allowed under the French law on the modernisation of Net profit for financial year 2017 came to €384 million, compared the economy (Loi de modernisation de l’économie – LME). with €431 million in 2016. The table below presents the ageing of receivables and payables by invoice date:

84 THALES — Document de référence 2017 Parent company management report and financial statements — 2017 Financial Information

• INVOICES RECEIVED AND ISSUED AT CLOSING DATE OF FINANCIAL YEAR JUST ELAPSED (TABLE PROVIDED FOR IN SECTION I, ARTICLE D.441-4)

Article D.441 I.-1e: Invoices received and not settled Article D.441 I.-2e: Invoices issued and not settled as at closing date of financial year just elapsed as at closing date of financial year just elapsed

Day 0 1 to 30 31 to 60 61 to 90 91 or more Total Day 0 1 to 30 31 to 60 61 to 90 91 or more Total (illustrative) days days days days (or more (illustrative) days days days days (1 or more days) days)

A. Payment period tranches Number of invoices involved 245 313 400 424

Total value of invoices 1 involved (including taxes) 45.3 2.9 0.6 0.1 0.5 4.0 44.6 18.8 6.0 1.1 3.4 29.3

Percentage of total purchases during the year (including taxes) 7.55 % 0.48 % 0.09 % 0.01 % 0.09 % 0.66 %

Percentage of total sales during the year (including taxes) 5.61 % 2.36 % 0.75 % 0.14 % 0.43 % 3.69 %

B. Invoices excluded from (A) corresponding to debts and receivables in dispute or not posted Number of invoices 9 56

Total invoices excluded, define: excluding or including taxes) 0.3 1.6

C. Reference payment periods used (contractual or legal periods – Articles L.441-6 or L.443-1 of Commercial Code) Payment periods used for Contractual periods: 45 days end of month Contractual periods: 45 days end of month calculating payment terms Legal periods: (define) Legal periods: (define)

1.3.1.3 Events after the reporting period

A tax audit was carried out on Thales SA’s accounting records for the 2011 to 2015 reporting periods. This audit did not result in any significant adjustments for the Company.

1.3.1.4 Outlook for the current financial year

The Company results for 2018 are expected to reflect the dividends paid by certain subsidiaries for financial year 2017 and changes in provisions for impairment of equity investments and subsidiary risks as a consequence of trends in their business and performance in 2018.

2017 Registration Document — THALES 85 2017 Financial Information — Parent company management report and financial statements

1.3.1.5 Proposed allocations of earnings and dividend policy

The Annual General Meeting, deliberating under the quorum and The sums corresponding to the dividends which, in accordance with the majority conditions required for annual general meetings, noted (1) that provisions of the fourth paragraph of Article L. 225- 210 of the French distributable earnings include: Commercial Code, have not been paid on treasury shares held by the Company, will be reallocated as retained earnings. The net profit for financial year 2017 €383,832,504.79 In accordance with Article 243 bis of the French Tax Code, the entire Less allocations to legal reserve (€139,187.70) declared dividend (interim and remaining dividend amount) qualifies for the 40% tax relief for individual taxpayers whose tax residence is in Plus retained earnings at 31 December 2017 €1,605,673,272.86 France, as provided for in Article 158- 3 2° of the French Tax Code. As Plus interim dividend in the amount of it relates to the remaining dividend amount, the tax relief is only €0.45 per share paid on 8 December 2017 applicable where an express, irrevocable and general election has be and deducted from retained earnings €95,195,572.65 made for assessment according to the progressive scale for income tax. Where such election has not been made, the remaining dividend For a total amount of €2,084,562,162.60 amount due to such individual taxpayers whose tax residence is in France will be subject to the flat rate tax (prélèvement forfaitaire unique The Annual General Meeting decided (1) to allocate this amount as follows: or PFU) introduced by the 2018 Budget Law without application of the 40% tax relief. Distribution of a dividend of €1.75 per share on 212,658,725 shares bearing rights as from In accordance with the law, the amounts of dividends paid out for the 1 January 2017 (including the interim dividend past three financial years are provided below: of €0.45 per share paid on 8 December 2017 charged to the 2017 dividend, for a total amount Financial year Dividend per share Total amount paid out of €95,195,572.65) €372,152,768.75 Retained earnings after dividend €1,712,409,393.85 2014 €1.12 (a) €230,660,829.08 Total equivalent to distributable earnings €2,084,562,162.60 2015 €1.36 (a) €285,659,762.04 2016 €1.60 (a) €338,279,587.20 The Annual General Meeting notes that, taking into account the interim dividend of €0.45 per share paid on 8 December 2017 and (a) The dividend corresponds to all income distributed for the financial year. deducted from retained earnings, the remaining dividend to be paid The full dividend amount was eligible for the tax relief provided for in Article 158-3 2° out is €1.30 per share. of the French Tax Code. The ex-dividend date is 30 May 2018 and payment date for the balance of the dividend will be 1 June 2018.

(1) Subject to the approval of the Annual General Meeting of 23 May 2018.

86 THALES — Document de référence 2017 Parent company management report and financial statements — 2017 Financial Information

1.3.1.6 Parent company management report cross-reference table

In accordance with Articles L. 225-100, L. 232-1, L. 247.1 and R. 225-102 of the French Commercial Code, the parent company management report includes the following information contained in the 2017 Registration Document:

Management report French Commercial Code Sections/Notes Pages

1. Thales (parent company) financial statements at 31 December 2017 Section 1.3.2.5 Table of subsidiaries and equity affiliates Note 23 112 Table of investments made and shareholding disclosures in French companies Note 23 112 Table of the results of the Company for the past five financial years Section 1.3.2.6 115 1 Table of outstanding stock purchase and subscription options at 31 December Note 15 103 Change in number and in value of the treasury shares of the Company Note 14 102 Write- back of general expenses following tax adjustment Note 6 96 Events after the reporting period Note 22 111 Information on existing branches (Article L. 232- 1, II of the French Commercial Code) Note 24 115

2. Control and risk management system Section 1.1.3 28

3. Management report and consolidated financial statements of the Group at 31 December 2017 Chapter 1 et 2 6 to 137 Presentation of the activities of the Company, its subsidiaries and controlled companies Section 2.4 135 Description of the main risks and uncertainties facing the Group Section 1.1.2 17 Information on the use of financial instruments (as a complement of the notes to the financial statements) Section 1.1.2 17 Information on the research and development activities Section 2.2 130

4. Corporate Governance Chapter 3 Compensation of other Group executives Section 3.4.1 169 Share- based payments Section 3.4.2 169

5. Company and share capital Chapter 4 Breakdown of shareholders and changes performed during the financial year Section 4.2.1 177 Employee shareholdings Section 4.2.3.6 186 Description of the share repurchase program adopted by the Annual General Meeting of 18 May 2016 Section 4.2.3.4 182 Transactions involving treasury shares during the financial year Section 4.2.3.8 188 Summary statement of transactions carried out during the financial year by directors, non- voting directors and related persons Section 4.2.3.7 187 Regulated agreements (continued existing agreements, with the exception of the assistance agreement between Thales and TSA which is now subject to the rules applicable to agreements relating to current operations (L. 225- 39 of the French Commercial Code) Section 4.3 189 Thales share price trend over the past two financial years Section 4.4.1.3 193

6. Corporate responsibility Chapter 5 Social information Section 5.1 200 Environmental information Section 5.2 217 Societal information Section 5.3 231 Information on the allocation of free shares during the financial year Section 5.1.4.4 210 Responsibility of the Independent Third- Party Section 5.4 240

2017 Registration Document — THALES 87 2017 Financial Information — Parent company management report and financial statements

1.3.2 Thales parent company financial statements for the year ended 31 December 2017

1.3.2.1 Income statement

(in € millions) Notes 2017 2016

Re-billing of rents 244.4 220.0 Research 14.1 13.3 Sales 258.5 233.3 Royalties 231.1 215.2 Re-billing of expenses 212.3 163.4 Other operating income 443.4 378.6 Reversals of provisions 21.3 16.0 Transfer of expenses 18.0 7.8 TOTAL OPERATING INCOME 741.2 635.7 Purchases and changes in inventories and work-in-progress (40.2) (27.3) Other external charges (533.2) (451.2) Taxes other than on income (11.8) (11.9) Personnel expenses (207.7) (191.5) Depreciation and amortisation (20.8) (20.9) Increase in provisions (17.1) (26.1) Total operating expenses (830.8) (728.9) INCOME (LOSS) FROM OPERATIONS Note 3 (89.6) (93.2) Net interest and finance costs (1.0) (1.1) Income from investments 544.7 496.1 Other financial income 37.6 60.6 Other financial expenses (65.2) (92.1) Financial income (expense) Note 4 516.1 463.5 PROFIT (LOSS) FROM ORDINARY ACTIVITIES BEFORE INCOME TAX 426.5 370.3 Non-recurring income (expense) Note 5 (52.5) (17.2) PROFIT (LOSS) BEFORE INCOME TAX 374.0 353.1 Income tax benefit (expense) Note 6 9.8 78.0 PROFIT FOR THE YEAR 383.8 431.1

The Notes to the financial statements are an integral part of the parent company financial statements.

88 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

1.3.2.2 Balance sheet

Assets

(in € millions) Notes 31 / 12/ 2017 31 / 12 / 2016

Intangible assets and property, plant and equipment, net Note 7 112.3 120.4 Equity investments Note 8 8,999.0 8,787.6 Treasury shares not assigned to plans Note 14 50.3 11.6 Other financial investments Note 9 79.1 82.1 Total non-current assets 9,240.7 9,001.7 1 Inventories and work in progress 11.8 12.0 Advances to suppliers Note 16 0.4 0.1 Trade receivables Note 16 197.1 188.8 Other receivables Note 16 327.6 733.1 Group company current-account receivables Note 10 1,079.3 875.8 Treasury shares assigned to plans Note 14 – 50.0 Accrued interests 3.8 7.3 Other investments Note 11 325.0 250.0 Cash and cash equivalents Note 11 3,450.5 3,183.1 Total current assets 5,395.5 5,300.2 TOTAL ASSETS 14,636.2 14,301.9

Shareholders’ equity and liabilities

(in € millions) Notes 31 / 12/20 17 31 / 12 /20 16

Share capital 638.0 636.6 Additional paid-in capital 4,053.2 4,036.9 Reserves and retained earnings 1,806.8 1,724.6 Profit for the year 383.8 431.1 Total shareholders’ equity Note 13 6,881.8 6,829.2 Provisions for contingencies and losses Note 17 199.0 197.8 Borrowings Note 12 1,570.7 1,459.2 Group company current-account payables Note 10 5,528.9 5,225.8 Advances received on contracts in progress Note 16 17.8 18.8 Trade payables Note 16 86.8 99.5 Other liabilities Note 16 351.2 471.6 Total liabilities 7,555.4 7,472.7 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 14,636.2 14,301.9

The Notes to the financial statements are an integral part of the parent company financial statements.

2017 Registration Document — THALES 89 2017 Financial Information — Parent company management report and financial statements

1.3.2.3 Statement of cash flows

(in € millions) Notes 2017 2016

Profit for the year 383.8 431.1

Add (deduct): Net depreciation, amortisation and impairment charges on intangible assets and property, plant and equipment Note 7 20.8 20.9 Provisions for post-employment and other employee benefits Note 17 5.2 5.8 Net provisions for impairment of investments and subsidiary risks Note 4 32.3 5.3 Loss (gain) on disposals of assets Note 5 40.4 13.0 Other items (6.1) 0.6 Operating cash flow 476.4 476.7 Change in working capital and provisions for operating contingencies and losses 261.1 53.5 CASH FLOW FROM OPERATING ACTIVITIES - I - 737.5 530.2 Payments for acquisitions of intangible assets and property, plant and equipment (13.1) (10.2) Proceeds from disposal of intangible assets and property, plant and equipment – 0.9 Net operating investment Note 7 (13.1) (9.3) Investments in subsidiaries and associates Note 8 (281.2) (147.4) Disposals of subsidiaries and associates Note 8 9.8 21.7 Decrease (increase) in other investments Note 11 (74.8) (250.0) Decrease (increase) in other financial investments and treasury shares (12.4) (60.3) Decrease (increase) in current-account receivables (223.3) 95.6 Net financial investment (581.9) (340.4) CASH FLOW USED IN INVESTING ACTIVITIES - II - (595.0) (349.7) Dividend distributions Note 13 (348.9) (296.8) Increase in share capital (exercise of subscription options) 18.0 45.7 Increase in borrowings 207.7 600.0 Decrease in borrowings (128.9) (641.8) Increase (decrease) in current-account payables 377.0 345.7 CASH FLOW FROM FINANCING ACTIVITIES - III - 124.9 52.8 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS I + II + III 267.4 233.3 Cash and cash equivalents at the beginning of the period 3,183.1 2,949.8 Cash and cash equivalents at the end of the period 3,450.5 3,183.1

The Notes to the financial statements are an integral part of the parent company financial statements.

90 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

1.3.2.4 Statement of changes in equity

(in € millions) Number of shares Share Issue Retained Profit for Total outstanding capital premiums earnings the year shareholders’ (in thousands) equity

At 1 January 2016 210,961 632.9 3,995.4 1,149.5 871.9 6,649.7 Allocation of 2014 profit – – – 871.9 (871.9) 0.0 Dividend distribution (see Note 13.2) – – – (296.8) – (296.8) Capital increase 1,234 3.7 41.5 – – 45.2 2016 profit – – – – 431.1 431.1 1 At 31 December 2016 212,195 636.6 4,036.9 1,724.6 431.1 6,829.2 Allocation of 2016 profit – – – 431.1 (431.1) 0.0 Dividend distribution (see Note 13.2) – – – (348.9) – (348.9) Capital increase 464 1.4 16.3 – – 17.7 2017 profit – – – – 383.8 383.8 At 31 December 2017 212,659 638.0 4,053.2 1,806.8 383.8 6,881.8

The Notes to the financial statements are an integral part of the parent company financial statements.

2017 Registration Document — THALES 91 2017 Financial Information — Parent company management report and financial statements

1.3.2.5 Notes to the parent company financial statements

NOTE 1 ACCOUNTING PRINCIPLES 93

NOTE 2 CHANGE IN THALES’S DIRECTLY OWNED INVESTMENTS 93

NOTE 3 OPERATING PROFIT (LOSS) 93

NOTE 4 FINANCIAL INCOME (EXPENSE) 94

NOTE 5 NON-RECURRING INCOME (EXPENSE) 95

NOTE 6 INCOME TAX 96

NOTE 7 PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 97

NOTE 8 EQUITY INVESTMENTS 98

NOTE 9 OTHER FINANCIAL INVESTMENTS 99

NOTE 10 GROUP COMPANY CURRENT ACCOUNT PAYABLES 99

NOTE 11 CASH AND OTHER INVESTMENTS 100

NOTE 12 BORROWINGS 100

NOTE 13 SHAREHOLDERS’ EQUITY 101

NOTE 14 TREASURY SHARES 102

NOTE 15 FREE SHARE PLANS AND STOCK OPTIONS GRANTED TO EMPLOYEES 103

NOTE 16 RECEIVABLES AND PAYABLES 105

NOTE 17 PROVISIONS FOR CONTINGENCIES AND LOSSES 106

NOTE 18 LEGAL AND ENVIRONMENTAL RISKS 108

NOTE 19 OFF-BALANCE SHEET COMMITMENTS 109

NOTE 20 MARKET RISKS 110

NOTE 21 RELATED PARTIES 111

NOTE 22 EVENTS AFTER THE REPORTING PERIOD 111

NOTE 23 SUBSIDIARIES AND ASSOCIATES 112

NOTE 24 INFORMATION ON EXISTING BRANCHES (ARTICLE L. 232- 1, II OF THE FRENCH COMMERCIAL CODE) 115

All the amounts in these notes are expressed in millions of euros (€m), with the exception of information related to numbers of employees and shares.

92 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

NOTE 1. ACCOUNTING PRINCIPLES

Thales is a French public limited company (société anonyme) and the parent company of Thales Group. The Thales parent company financial statements are prepared in accordance with the accounting principles applicable in France pursuant to the provisions of the French General Chart of Accounts (Plan Comptable Général) as defined in ANC Regulation 2017- 03. As from 1 January 2017, the accounting principles relating to forward financial instruments and hedging transactions are changing in accordance with ANC Regulation 2015- 05 of 2 July 2015. This new regulation has no impact on shareholders’ equity as at 1 January 2017. The impact on the presentation of the financial statements is described in Notes 16 and 20. These principles are detailed in each note hereafter. 1 NOTE 2. CHANGE IN THALES’S DIRECTLY OWNED INVESTMENTS

As part of the simplification of the legal structures in France, the following The value of Thales LAS France SAS shares at 31 December 2017 was operations were carried out in 2017: €754.9 million, corresponding to the sum of the book values of the companies’ shares before the merger. 1- Mergers in DMS France SAS: 3- Mergers in AVS France SAS: In September 2017 Thales sold Thales Microelectronics SAS shares to Thales Systèmes Aéroportés SAS (€4.6 million). In September 2017, Thales recapitalised Thales Electron Devices SAS (€40.0 million). In December 2017, Thales Underwater Systems SAS and Thales Microelectronics SAS merged into Thales Systèmes Aéroportés SAS, In December 2017, Thales Avionics LCD SAS, Thales Electron Devices SAS with legal effect as of 31 December 2017. Thales now owns 100% of and Thales Training & Simulation SAS merged into Thales Avionics SAS, the company, renamed Thales DMS France SAS on 1 January 2018. with legal effect as at 31 December 2017. Thales now holds 93.04% of the company, renamed Thales AVS France SAS on 1 January 2018. The value of Thales DMS France SAS shares as at 31/ 12 /2017 was €802.6 million corresponding to the sum of the book values of the The value of Thales AVS France SAS shares at 31 / 12 /2017 was companies’ shares before the merger. €1,016 million, the sum of the book values of the companies’ shares before the merger. 2- Mergers in LAS France SAS: Thales recapitalised Thales SESO SAS (€21.8 million). In September 2017 Thales purchased the shares of Thales Air Systems SAS held by Thales Systèmes Aéroportés SAS (€218.4 million). On 3 May 2017 Thales Belgium SA was dissolved and liquidated. Thales recognised a capital loss of €26.8 million (Note 5.2) and In September 2017 Thales sold Thales Cryogénie SAS shares to Thales received a dividend of €25.9 million (Note 4.2). At the same time Air Systems SAS (€0.7 million) after recapitalising it (€1.0 million). Forges de Zeebrugge was renamed Thales Belgium SA. In October 2017, Thales Systems Ireland Ltd merged into Thales Air In 2016, Thales purchased the shares in Thales Canada Inc held by Systems SAS. Thales Avionics SAS, Thales Overseas Ltd and Thales Nederland BV for In December 2017, TDA Armements SAS, Thales Angénieux SAS, €22.1 million, €8.6 million and €1.6 million, respectively. Thales Thales Optronique SAS, Thales Air Operations SAS and Thales Canada Inc is now wholly- owned by Thales. Cryogénie SAS merged into Thales Air Systems SAS, with legal effect Thales had purchased Forges de Zeebrugge from Thales Defense as at 31 December 2017. Thales now owns 100% of the company, Armements SAS for €26.2 million and then increased the share capital renamed Thales DMS France SAS at 1 January 2018. by €8 million with the intention of acquiring the business of Thales Belgium SA.

NOTE 3. OPERATING PROFIT (LOSS)

In addition to its functions as a holding company (holding equity investments, managing central support functions and cash pooling), the 3.2 Operating expenses parent company manages the real estate of its French operating Operating expenses mainly include personnel expenses (employees of subsidiaries and carries out its own research activity in France. Thales parent company and directors), real estate rents and related services, and other external services (notably provided by Thales 3.1 Operating income Global Services, which incorporates the Group’s shared services).

Consequently, operating income includes: • rents re-billed to operating subsidiaries and sales of research, which represent the sales of the parent company (€258.5 million in 2017 compared to €233.3 million in 2016), mainly realised in France; • royalties paid by subsidiaries for shared services, and re-billed expenses for general and specific services provided to the subsidiaries by the parent company.

2017 Registration Document — THALES 93 2017 Financial Information — Parent company management report and financial statements

NOTE 4. FINANCIAL INCOME (EXPENSE)

4.1 Accounting principles

Financial income (expense) mainly includes: • interest expenses and finance costs on net debt; • income and expenses related to Thales’ directly owned investments (dividends and depreciation, see Note 8); • the financial component of the increase in provisions for post- employment and other employee benefits (see Note 17); • foreign exchange gains and losses (see Note 20).

4.2 Analysis of financial income (expense)

Notes 2017 2016

NET INTEREST AND FINANCE COSTS (1.0) (1.1) Interest and financial income: 27.9 32.8 Interest on Group company current account receivables and loans to subsidiaries and associates 4.9 4.5 Interest on cash and cash equivalents 23.0 28.3 Interest and financial expenses: (38.6) (48.4) Interest on Group company current account payables and borrowings from subsidiaries and associates (6.6) (10.2) Interest on bonds and other borrowings (32.0) (38.2) Interest on interest rate swaps hedging borrowings 9.7 14.5 INCOME FROM INVESTMENTS (a) Note 23 544.7 496.1 OTHER FINANCIAL INCOME 37.6 60.6 Reversal of provisions related to associates (b) 9.9 53.1 Reversal of provisions for termination payments and other benefits Note 17 – 1.2 Foreign exchange gains 23.6 0.3 Reversal of provisions for currency risks 1.8 1.7 Amounts recovered on clawback provisions 1.2 0.7 Other 1.1 3.6 OTHER FINANCIAL EXPENSES (65.2) (92.1) Increase in provisions related to associates (b) (42.2) (58.4) Increase in provisions for impairment of treasury shares (2.1) – Increase in provisions for termination payments and other benefits Note 17 (9.0) (10.6) Foreign exchange losses (0.1) (18.3) Increase in provisions for currency risks (1.9) – Waiver of loan (7.5) – Other (2.4) (4.8) FINANCIAL INCOME (EXPENSE) 516.1 463.5

(a) Including Thales Belgium SA (€25.9 million).

94 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

(b) Provisions related to subsidiaries and associates 2017 2016

Reversal Increase Reversal Increase

Provisions for impairment of equity investments – (27.3) 52.3 (48.5) Avimo Group Ltd – (10.4) 4.3 – Thales SESO SAS – (10.3) – (11.2) THALES GLOBAL SERVICES SAS – (6.2) – – Thales Holdings UK Plc – – 35.1 – Thales Belgium SA – – 9.6 – Thales Microelectronics SAS – – 1.2 – 1 Thales Avionics Electrical Systems SAS – – – (33.0) Other – (0.4) 2.1 (4.3) Provisions for subsidiary risks (see Note 17.2) 9.9 (14.9) 0.8 (9.9) Thales Digital Factory SAS – (7.9) – – Thales Global Services SAS – (5.3) – – Thales SESO SAS 9.9 – – (9.9) Other – (1.7) 0.8 – TOTAL 9.9 (42.2) 53.1 (58.4)

NOTE 5. NON- RECURRING INCOME (EXPENSE)

• capital gains or losses on disposals, particularly of businesses or 5.1 Accounting principles equity investments. As an exception to the guidelines of the French General Chart of Accounts and in order to give a more accurate Non- recurring income (expense) includes: presentation of these transactions, reversals of provisions for • restructuring costs: impairment of equity investments and reversals of provisions for these primarily relate to severance payments, redundancy payments, subsidiary risks are included in income from disposals; costs for notice periods not worked and other costs linked to the • other income and expenses arising on events that are unusual as closure of facilities such as site rehabilitation or asset write-offs. regards their frequency, nature or amount. These costs and the costs directly linked to restructuring measures (removal costs, training costs for transferred employees, etc.) are recognised as restructuring costs in the income statement;

5.2 Analysis of non- recurring income (expense)

2017 2016

Restructuring costs (11.3) (7.7) Capital gains or losses on disposals (40.4) (13.0) Liquidation of Thales Belgium SA (26.8) – Disposal of Thales Microelectronics SAS (5.3) – Sale of treasury shares (1.6) 2.4 Disposal of Cryogénie SAS (0.7) – Reimbursement of Thales Suisse capital – (13.7) Disposal of Thales Université SAS – (3.4) Disposal of Thales Geodis Freight & Logistics SA – 3.6 Other (6.0) (1.9) Reversal (increase) in provisions for non-recurring risks (0.8) 3.5 NON-RECURRING INCOME (EXPENSE) (52.5) (17.2)

2017 Registration Document — THALES 95 2017 Financial Information — Parent company management report and financial statements

NOTE 6. INCOME TAX

The corporate income tax rate for fiscal years 2017 and 2016 was 6.1 General framework 34.43%, including the social contribution on profits. Tax loss and accounting principles carryforwards are attributable up to the limit of 50% of taxable profit in excess of €1 million. Since 1 January 1992, Thales has opted for the Group tax In addition, the amended 2012 Finance Act had introduced a 3% tax consolidation regime. Thales is the head of a tax consolidation group on dividends paid. By a decision published on 6 October 2017, the that includes the majority of its French subsidiaries pursuant to the tax French Constitutional Council overturned this tax entirely. In regime provided for by Article 223A of the French Tax Code. December 2017, Thales was reimbursed the full amount paid between In accordance with the tax consolidation agreement entered into 2013 and 2017, representing €41.9 million, including default interest. between Thales and its subsidiaries, each subsidiary in the tax group Against this backdrop, the amended Finance Act introduced an records the amount of tax it would have paid had they been taxed exceptional tax for 2017, taking the corporate tax rate for Thales from separately. Any tax savings arising on the use of tax losses of 34.43% to 44.43%. The corresponding expense amounts to subsidiaries are recorded by the parent company and recognised in the €45.2 million. These amounts were deducted from / reimbursed to income statement. However, the parent company may have to record a subsidiaries according to the existing tax consolidation agreement. corresponding tax expense, if and when these subsidiaries return to Thales also benefits from tax credits related to its research and profit and are able to deduct the losses as they would have done had development activities at the Palaiseau site which are recorded against they been taxed separately. income tax expense.

6.2 Current tax

The income tax benefit breaks down as follows:

2017 2016

Income tax benefit received from tax group subsidiaries 176.3 173.4 Income tax due to the French State (159.0) (109.8) Income tax benefit resulting from tax consolidation 17.3 63.6 Exceptional contribution due to Thales by beneficiary subsidiaries 25.1 – Exceptional contribution due to the French State by Thales (45.2) – Expense resulting from tax consolidation under the exceptional contribution (21.1) – Reimbursement by Thales to beneficiary subsidiaries of the 3% tax on dividends (30.4) 12.3 3% tax on dividends paid to the French State (7.6) (8.9) Reimbursement by the State of the 3% tax on dividends 41.9 – Benefit resulting from tax consolidation under the 3% tax on dividends 3.9 3.4 Research tax credit 8.6 7.7 Prior period adjustments and other taxes 1.1 3.3 INCOME TAX BENEFIT 9.8 78.0

In 2017 as in 2016, no non-deductible general expenses were of the French Tax Code amounted to €0.2 million in both 2017 and reintegrated as a result of a tax audit. Expenditure excluded from 2016, reflecting excess amortisation of vehicles. deductible expenses in accordance with Articles 223 quater and 39.4

6.3 Deferred tax

The Company has available future tax savings due to temporary for post- employment benefits, which are not deductible for tax differences arising on the different tax and accounting treatments of purposes. There were no remaining tax loss carryforwards at income and expenses (€143.3 million at 31 December 2017 31 December 2017. compared with €128.0 million at 31 December 2016). These mainly The corresponding deferred tax is not recognised. reflect provisions for contingencies and losses, in particular provisions

96 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

NOTE 7. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

7.1 Accounting principles

Intangible assets (mainly software) and property, plant and equipment Fixed assets held under finance leases or hire purchase agreements are are recognised at their acquisition cost in the balance sheet. They are not recognised and are reported in off- balance sheet commitments. amortised or depreciated on a straight-line or declining-balance basis, over the period of their estimated useful lives (20 years for buildings and 3 to 10 years for other assets). 1

7.2 Breakdown by type

31 / 12/ 2017 31 / 12 / 2016

Gross Cumulated Net Gross Cumulated Net value amort. value amort. and depr. and depr.

Intangible assets 18.9 (18.8) 0.1 18.8 (18.7) 0.1 Buildings 209.7 (122.7) 87.0 201.5 (109.5) 92.0 Industrial plant, equipment and machinery 39.5 (36.3) 3.2 44.0 (41.0) 3.0 Other property, plant and equipment 34.9 (12.9) 22.0 36.0 (10.7) 25.3 Property, plant and equipment 284.1 (171.9) 112.2 281.5 (161.2) 120.3 TOTAL 303.0 (190.7) 112.3 300.3 (179.9) 120.4

7.3 Change in net assets

Intangible Property, plant Total assets and equipment

Net value at 01 / 01 / 2016 – 132.2 132.2 Acquisitions 0.2 10.0 10.2 Disposals – (0.9) (0.9) Depreciation and amortisation (0.2) (20.7) (20.9) Other 0.1 (0.3) (0.2) Net value at 31 / 12 / 2016 0.1 120.3 120.4 Acquisitions 0.1 13.1 13.2 Disposals – – – Depreciation and amortisation (0.1) (20.7) (20.8) Other – (0.5) (0.5) NET VALUE AT 31 / 12 / 2017 0.1 112.2 112.3

2017 Registration Document — THALES 97 2017 Financial Information — Parent company management report and financial statements

NOTE 8. EQUITY INVESTMENTS

The assumptions used are prudent with forecast growth in sales and 8.1 Accounting principles terminal values limited to 2%. Equity investments are recorded at cost price and related acquisition The discount rate used is calculated on the basis of the Group’s costs are recognised in the income statement. In the event that the weighted average cost of capital (8.5% in 2017 as in 2016), adjusted inventory value exceeds the book value, a provision for impairment is if necessary for the specific risks attributable to each equity investment. recorded for the difference. This rate is mainly based on the market risk- free rate, risk factors inherent in the Group’s businesses, the Group’s marginal borrowing rate The inventory value is determined based on profitability forecasts, the and specific risks for which cash flows have not been adjusted. underlying assets, recent transactions or the market price of any listed securities. Impairment tests are carried out annually at year- end in line with the Group’s internal schedule for the preparation of Group entity strategic plans. The profitability forecasts are determined on the basis of expected future cash flows set out in the three- year strategic plans and a terminal value.

8.2 Change in equity investments

A breakdown of equity investments is presented in Note 23. Changes are presented below:

Notes Gross value Provisions Net

VALUE AT 01 / 01 / 2016 10,005.5 (1,332.2) 8,673.3 Acquisitions / capital subscriptions and transactions 147.4 147.4 Increase in capital of Thales Avionics Electrical Systems SAS 76.0 – 76.0 Purchase and increase in capital of Forges de Zeebrugge 34.2 – 34.2 Increase in capital of Thales Université SAS 5.0 – 5.0 Acquisition of shares in Thales Canada Inc 32.2 – 32.2 Disposals (21.7) – (21.7) Sale of Thales Geodis Freight & Logistics SA (5.7) – (5.7) Reimbursement of capital of Thales Suisse (16.0) – (16.0) Increase in provisions for impairment Note 4 – (48.5) (48.5) Reversal of provisions for impairment Note 4 – 52.3 52.3 OTHER (41.1) 25.9 (15.2) VALUE AT 31 / 12 / 2016 10,090.1 (1,302.5) 8,787.6 Acquisitions / capital subscriptions and transactions 281.2 – 281.2 Increase in capital of Thales SESO SAS 21.8 – 21.8 Purchase of Thales Air Systems SAS shares 218.4 – 218.4 Increase in capital of Thales Electron Devices SAS 40.0 – 40.0 Increase in capital of Thales Cryogénie SAS 1.0 – 1.0 Disposals (9.8) – (9.8) Sale of Thales Microelectronics SAS (4.6) – (4.6) Sale of Thales Cryogénie SAS (0.7) – (0.7) Liquidation of Thales Belgium SA (4.5) – (4.5) Increase in provisions for impairment Note 4 – (27.3) (27.3) Other (123.3) 90.4 (32.9)

VALUE AT 31 / 12 / 2017 10,238.2 (1,239.4) 8,999.0

98 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

NOTE 9. OTHER FINANCIAL INVESTMENTS

9.1 Accounting principles

Other financial investments mainly include loan agreements signed by Other financial investments also include deposits paid as part of real Thales with its direct or indirect subsidiaries and associates. These loans are estate commitments and other financial receivables. presented separately from the current account agreements, which are used An impairment loss is recognised depending on the risk of non recovery. in the daily management of cash requirements or surpluses (see Note 10).

9.2 Breakdown by type 1

31 / 12/ 2017 31 / 12 / 2016

Gross Impair- Net Gross Impair- Net value ment value value ment value

Loans to direct subsidiaries and associates (see Note 23) 26.1 (25.5) 0.6 27.1 (25.5) 1.6 Loans to other Group subsidiaries 46.7 – 46.7 64.8 – 64.8 Loans to other Group associates 3.9 – 3.9 6.3 – 6.3 Other financial investments 29.5 (1.6) 27.9 11.0 (1.6) 9.4 TOTAL 106.2 (27.1) 79.1 109.2 (27.1) 82.1

9.3 Breakdown by maturity and by currency

Breakdown by maturity 31/ 12 / 2017 31 / 12 / 2016 Breakdown by currency 31/ 12 / 2017 31 / 12 /2016 Euro 50.5 48.8 Less than 1 year 59.9 60.9 South African rand 12.4 22.3 From 1 to 5 years 14.0 12.7 Chinese yuan 10.3 8.3 More than 5 years 5.2 8.5 Other currencies 5.9 2.7 TOTAL 79.1 82.1 TOTAL 79.1 82.1

NOTE 10. GROUP COMPANY CURRENT ACCOUNT PAYABLES

Under this centralised system, the cash surpluses of subsidiaries are 10.1 General framework and generally transferred to the parent company. In return, the parent accounting principles company meets the cash flow requirements of the subsidiaries. Except in special cases, this system applies to all subsidiaries in which Thales The Group company current account amounts presented in the parent has majority control. company balance sheet represent the receivables and payables Group company current account receivables and payables are always between the parent company and its subsidiaries as part of the Group’s recognised as due within one year. cash pooling organisation.

10.2 Current account receivables

31 / 12 / 2017 31 / 12 / 2016

Amounts due from direct subsidiaries and associates (see Note 23) 911.2 758.0 Amounts due from other subsidiaries 168.1 117.8 TOTAL 1,079.3 875.8

2017 Registration Document — THALES 99 2017 Financial Information — Parent company management report and financial statements

10.3 Current account payables

31 / 12 / 2017 31 / 12 / 2016

Amounts deposited by direct subsidiaries and associates (see Note 23) 4,880.2 4,097.5 Amounts deposited by Thales Alenia Space (France and Italy) 160.2 185.7 Amounts deposited by Thales Australia Ltd 74.1 319.1 Amounts deposited by other Group subsidiaries 414.2 623.5 TOTAL 5,528.9 5,225.8

NOTE 11. CASH AND OTHER INVESTMENTS

11.1 Accounting principles 11.3 Other investments

Cash and cash equivalents include cash at bank and in hand as well Other investments correspond to term deposits with banks with as short-term, liquid investments that are easily converted into a known maturities of 3 to 12 months. amount of cash and exposed to negligible risk of a change in value.

11.2 Cash and cash equivalents

Cash and cash equivalents amounted to €3,450.5 million at 31 December 2017 compared with €3,183.1 million at 31 December 2016. This amount includes €2,199.4 million (€2,886.2 million at year-end 2016) of term deposits, euro- denominated money- market funds (“SICAV”), negotiable debt securities, and other investments with maturities of less than three months.

NOTE 12. BORROWINGS

12.1 Accounting principles

Bonds are recognised at their redemption value. Any issue or basis. Bond issue expenses are recognised on a straight- line basis over redemption premiums are recognised under the corresponding balance the term of the bond. sheet line item and taken to financial income (expense) on a straight-line

12.2 Breakdown of borrowings

Nominal Variable 31/ 12 / 2017 31 / 12 /2016 rate rate swaps

Bonds maturing in June 2023 Fixed rate 0.75% €400 million 600.0 600.0 Bonds maturing in March 2021 Fixed rate 2.25% €300 million 300.0 300.0 Bonds maturing in March 2018 Fixed rate 1.63% €300 million 500.0 500.0 Other borrowings 156.4 45.0 Accrued interest 14.3 14.2 GROSS BORROWINGS 1,570.7 1,459.2

100 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

At 31 December 2017, no material Group financing was subject to programme and as a financial reserve. The related agreement states covenants requiring accelerated or early repayment based on the that in the event that the French State no longer holds its golden share Group’s credit rating or financial ratios. and the consolidated net debt /EBITDA ratio (1) also exceeds 3, early repayment clauses will apply. At 31 December 2017, confirmed and undrawn credit facilities agreed with a pool of banks amounted to €1,500 million, expiring in 2021. At December 31, 2017, the Group also benefited from an unused These credit facilities are used as a backup to the commercial paper bridge loan to finance its acquisition offer for Gemalto.

12.3 Breakdown of borrowings by maturity and by currency

Breakdown by maturity 31/ 12 / 2017 31 / 12 / 2016 Breakdown by currency 31/ 12 / 2017 31 / 12 /2016 1

Less than 1 year 670.7 59.2 euro 1,425.4 1,425.3 From 1 to 5 years 300.0 800.0 Singapore dollar 32.6 33.9 More than 5 years 600.0 600.0 Pound sterling 112.7 – TOTAL 1,570.7 1,459.2 TOTAL 1,570.7 1,459.2

NOTE 13. SHAREHOLDERS’ EQUITY

13.1 Share capital

Thales’ share capital of €637,976,175 at 31 December 2017, is composed of 212,658,725 shares, compared with 212,194,766 shares at 31 December 2016, with a par value of €3 each. This represents an increase of 463,959 shares resulting from the exercise of share subscription options. The breakdown of share capital is presented below:

31 / 12 / 2017 31 / 12 / 2016

Shares % of % voting Shares % of % voting capital rights capital rights

TSA 54,786,654 25.76% 35.75% 54,786,654 25.82% 35.86% French State (including 1 golden share) 2,060 – – 2,060 – – Public Sector (a) 54,788,714 25.76% 35.75% 54,788,714 25.82% 35.86% Dassault Aviation (b) 52,531,431 24.70% 28.44% 52,531,431 24.76% 28.53% Thales (c) 568,739 0.27% – 749,559 0.35% – Employees 6,181,444 2.91% 3.50% 5,743,081 2.71% 3.31% Other shareholders 98,588,397 46.36% 32.31% 98,381,981 46.36% 32.30% TOTAL (d) 212,658,725 100.00% 100.00% 212,194,766 100.00% 100.00%

(a) Under the terms of the shareholders’ agreement with Dassault Aviation (the “Industrial Partner”), the “Public Sector” (the French State) is represented by the company TSA, excluding the State directly. All Thales shares held directly and indirectly by the French State have been in directly registered form for more than two years and thus have a double voting right on 31 December 2017. (b) As at 31 December 2017, Dassault Aviation held 42,154,349 shares in directly registered form, of which 34,654,349 shares have been held for more than two years, thus granting it double voting rights, and held 10,377,082 shares in bearer form. (c) Treasury shares represented 126,000 bearer shares held under a liquidity contract and 442,739 directly registered shares. (d) During 2017, 463,959 new shares bearing rights from 1 January 2017 were created as a result of the exercise of share subscription options.

At 31 December 2017, there are no securities giving access to the Company’s capital, with the exception of the share subscription options described in the Note below.

(1) EBITDA is the sum of operating income, depreciation of non- current assets and impairment of intangible assets, net of goodwill amortisation. This indicator is calculated in accordance with French accounting principles.

2017 Registration Document — THALES 101 2017 Financial Information — Parent company management report and financial statements

13.2 Reserves and retained earnings

31 / 12 /2016 Allocation of Balance of 2017 interim 31/ 12 / 2017 2016 profit 2016 dividend dividend

Legal reserve 63.3 0.4 – – 63.7 Blocked reserve 8.3 – – – 8.3 Ordinary reserve 128.9 – – – 128.9 Other reserves 0.3 – – – 0.3 Retained earnings 1,523.8 430.7 (253.7) (95.2) 1,605.6 TOTAL 1,724.6 431.1 (253.7) (95.2) 1,806.8

Thales allocated €338.3 million of the profit for the 2016 financial year to dividends (€1.6 per share), paying a €84.6 million interim dividend in December 2016, and the balance of €253.7 million in June 2017. Thales paid a €95.2 million interim dividend in December 2017 in respect of the 2017 financial year.

NOTE 14. TREASURY SHARES

• treasury shares assigned to a free share plan are recorded under 14.1 Accounting principles marketable securities, either at their acquisition cost if the shares were assigned from the beginning of the plan, or at their net carrying value Thales carries out transactions in its own shares in accordance with the at the reclassification date if they were assigned after their acquisition. authorisations granted to the Board of Directors by the Annual General Meeting. These treasury shares are not measured at market value because they are set aside to be granted to employees. Accordingly: At year-end, treasury shares are recognised and measured on the basis of their assigned function: – shares allocated to parent company (Thales) employees are amortised on a straight- line basis over the term of the plan treasury shares that have not been assigned are recorded under • (48 months) through an increase in provisions for contingencies other financial investments at their acquisition cost. At the reporting and losses recorded in liabilities, date, an impairment loss is recognised if their carrying value – shares allocated to other Group employees are maintained at exceeds the average stock market price for December; historical cost, as they will be re billed to the relevant subsidiaries for the same amount.

14.2 Change in treasury shares

Change in the number of treasury shares At 31 December 2017, Thales held 568,739 treasury shares, including 126,000 shares (0.06% of share capital) that were freely transferable.

2017 2016

Freely Treasury Total Freely Treasury Total transferable shares treasury transferable shares treasury treasury assigned shares treasury assigned shares shares to plans shares to plans

At 1 January 126,044 623,515 749,559 215,830 623,424 839,254 Purchases under the liquidity contract 819,512 – 819,512 513,001 – 513,001 Disposals under the liquidity contract (743,512) – (743,512) (472,001) – (472,001) Transfer to employees under the employee share purchase plan (462,217) – (462,217) (41,714) – (41,714) Stock market purchases 852,000 – 852,000 76,044 498,956 575,000 Delivery of free shares – (606,603) (606,603) – (607,381) (607,381) Exercise of stock options (40,000) – (40,000) (56,600) – (56,600) Reclassified shares 16,912 (16,912) – (108,516) 108,516 – Net change 442,695 (623,515) (180,820) (89,786) 91 (89,695) At 31 December 568,739 – 568,739 126,044 623,515 749,559

102 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

Change in the value of treasury shares

Freely transferable treasury shares 2017 2016 Treasury shares assigned to plans 2017 2016

At 1 January 11.6 8.2 At 1 January 50.0 17.0 Purchases under the liquidity contract 75.4 39.4 Delivery of free shares (48.6) (16.6) Disposals under the liquidity contract (69.0) (35.4) Stock market purchases – 45.5 Transfer to employees under Reclassified free shares (1.4) 4.1 the employee share purchase plan (43.6) (1.6) At 31 December – 50.0 Stock market purchases 78.3 7.0 Provisions for contingencies and losses (18.4) (18.1) Exercise of stock options (3.7) (1.9) 1 Reclassified shares 1.3 (4.1) At 31 December 50.3 11.6 Of which, acquisition cost 52.4 11.6 Of which, impairment (2.1) – Average share price for December €88.43 €91.16

NOTE 15. FREE SHARE PLANS AND STOCK OPTIONS GRANTED TO EMPLOYEES

At 31 December 2017, the following options, shares and units were • 477,860 free shares, of which 360,300 are subject to outstanding: performance conditions; • 850 share purchase options at a weighted average exercise price • 1,235,940 units, of which 480,150 are subject to performance of €38.50; conditions; • 783,204 share subscription options at a weighted average • 142,180 phantom shares, granting the right to a cash payment after exercise price of €34.13, of which 155,427 are subject to a four-year vesting period, of which 103,390 are subject to performance conditions; performance conditions.

15.1 Outstanding share purchase option plans

Date of Board Exercise Exercise Number of options Options exercised Number of options decision period price outstanding at in 2017 outstanding at 31 / 12 / 2016 31 / 12 /2017

25 / 11 / 08 from 25 / 11 / 12 to 24 / 11 / 18 €38.50 850 – 850 04 / 07 / 07 from 04 / 07 / 11 to 03 / 07 / 17 €44.77 40,000 (40,000) –

15.2 Outstanding share subscription option plans

Date of Board Exercise Exercise Number of options Options Options Number of options decision period period outstanding at exercised cancelled outstanding at 31 / 12 / 2016 in 2017 in 2017 31/ 12 / 2017

15 / 09 / 11 (a) from 15 / 09 / 15 to 14 / 09 / 21 €26.34 126,322 (40,945) – 85,377 23 / 09 / 10 (a) from 23 / 09 / 14 to 22 / 09 / 20 €26.34 110,150 (40,100) – 70,050 25 / 06 / 09 from 25 / 06 / 13 to 24 / 06 / 19 €32.88 362,584 (84,342) (5,490) 272,752 01 / 07 / 08 from 01 / 07 / 12 to 30 / 06 / 18 €38.50 463,237 (96,732) (11,480) 355,025 04 / 07 / 07 from 04 / 07 / 11 to 03 / 07 / 17 €44.77 258,400 (201,840) (56,560) –

(a) Subject to the achievement of internal performance conditions over the three financial years following the grant date.

2017 Registration Document — THALES 103 2017 Financial Information — Parent company management report and financial statements

Options granted and exercised in 2017

Number of Exercise price Date of plan options granted/ shares subscribed or purchased 1. Directors Options granted in 2017 None

2. The ten biggest option awards granted to employees Options granted in 2017 None

3. The ten biggest exercises of options by employees (a) Options exercised in 2017 8,000 €32.88 25 / 06 / 09 7,291 €26.34 15 / 09 / 11 7,000 €26.34 15 / 09 / 11 5,945 €26.34 15 / 09 / 11 5,500 €38.50 01 / 07 / 08 5,000 €44.77 04 / 07 / 07 4,800 €38.50 01 / 07 / 08 4,600 €44.77 04 / 07 / 07 4,600 €38.50 01 / 07 / 08 4,500 €44.77 04 / 07 / 07

(a) All Group companies combined.

15.3 Allotment of free shares

Date of Board Vesting Share price Number of Shares Shares Shares Balance of decision period at grant date free shares at granted cancelled delivered free shares at 31 / 12 / 2016 in 2017 in 2017 in 2017 31/ 12 / 20 17

28 / 09 / 17 from 28 / 09 / 17 €94.66 – 212,540 (a) – – 212,540 to 28 / 09 / 21 27 / 10 / 16 from 27 / 10 / 16 €83.10 87,860 – (300) – 87,560 to 27 / 10 / 20 148,070 (a) – (310) – 147,760 17 / 09 / 13 from 17 / 09 / 13 €39.16 397,180 – (9,274) (387,906) – to 17 / 09 / 17 226,335 (a) – (7,638) (218,697) – 20 / 12 / 12 from 20 / 12 / 12 €27.47 50 (b) – – (50) – to 20 / 12 / 16

(a) Subject to the achievement of internal performance conditions over the three financial years following the grant date. (b) Adjustment in 2016.

15.4 Allotment of share units indexed to the value of Thales shares

Date of allocation Vesting Share price Number Post-closing Units Units Balance decision Period at grant date of units adjustments cancelled delivered of units at 31 / 12 /20 16 in 2017 in 2017 at 31/ 12 / 2017

17 / 09 / 15 from 17 / 09 / 15 €61.75 367,730 (620) (b) (9,050) (270) 359,030 to 17/ 09 / 19 229,200 (a) – (7,750) – 221,450 16 / 09 / 14 from 16 / 09 / 14 €42.42 405,210 – (8,210) (240) 396,760 to 16 / 09 / 18 268,000 (a) – (9,300) – 258,700

(a) Subject to the achievement of internal performance conditions over the three financial years following the grant date. (b) People in mobility programmes whose units were cancelled in error as their reason for leaving was incorrectly stated.

104 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

15.5 Allotment of phantom shares indexed to the value of Thales shares

Date of allocation Vesting Share price Number of Phantom shares Number of decision Period at grant date phantom shares cancelled in 2017 phantom shares at 31 / 12 /20 16 at 31 / 12 / 2017

28 / 09 / 17 from 28 / 09 / 17 – 67,140 (a) (140) 67,000 to 29 / 09 / 21 27 / 10 / 16 from 27 / 10 / 16 – 39,430 (640) 38,790 to 27 / 10 / 20 – 37,910 (a) (1,420) 36,390 1 (a) Subject to the achievement of internal performance conditions over the three financial years following the grant date.

NOTE 16. RECEIVABLES AND PAYABLES

Following application of the new ANC Regulation 2015-05, 16.1 Accounting principles unrealised results on derivatives and foreign exchange guarantees are maintained as off- balance sheet commitments. Payables and receivables denominated in foreign currencies are revalued at the closing price. Temporary cash offsets between the amounts received/ paid to subsidiaries and Thales’s cash receipts/ payments to banks with regard Thales (parent company) hedges currency risks related to contracts or to managing foreign exchange derivatives are recorded in the balance normal commercial transactions on behalf of its subsidiaries. sheet under “Translation difference and exchange rate adjustments”, Until the end of 2016, the derivatives subscribed by Thales (parent using the symmetry principle applicable to hedging transactions. company) with banks and the foreign exchange guarantees granted to subsidiaries were recorded at their market value in the balance sheet under “Translation difference and exchange rate adjustments”.

16.2 Breakdown of receivables and payables

31 / 12 / 2017 31 / 12 / 2016

Gross Provisions Net Net

Advances to suppliers 0.4 – 0.4 0.1 Trade receivables 198.8 (1.7) 197.1 188.8 Other receivables 330.5 (2.9) 327.6 733.1 Income tax receivables from the French State (mainly research tax credits) 229.7 – 229.7 320.7 Translation difference and exchange rate adjustments 12.5 – 12.5 356.5 Tax and social security receivables 30.9 – 30.9 27.2 Other 57.4 (2.9) 54.5 28.7 TOTAL 529.7 (4.6) 525.1 922.0 Advances received on contracts in progress 17.8 – 17.8 18.8 Trade payables 86.8 – 86.8 99.5 Other liabilities 351.2 – 351.2 471.6 Tax liabilities towards consolidated subsidiaries 196.8 – 196.8 152.1 Translation difference and exchange rate adjustments 14.5 – 14.5 187.5 Tax payables, excluding income tax and social security 98.1 – 98.1 82.0 Other 41.8 – 41.8 50.0 TOTAL 455.8 – 455.8 589.9

2017 Registration Document — THALES 105 2017 Financial Information — Parent company management report and financial statements

16.3 Breakdown of receivables and payables by maturity at 31 December 2017

Net Maturity

< 1 year 1 to 5 years > 5 years

Advances to suppliers 0.4 0.4 – – Trade receivables 197.1 197.1 – – Other receivables 327.6 218.9 108.7 – TOTAL RECEIVABLES 525.1 416.4 108.7 – Advances received on contracts in progress 17.8 17.8 – – Trade payables 86.8 86.8 – – Other liabilities 351.2 273.4 60.4 13.8 TOTAL PAYABLES 455.8 378.0 60.4 13.8

NOTE 17. PROVISIONS FOR CONTINGENCIES AND LOSSES

17.1 Accounting principles These plans are recognised in the Company’s financial statements as follows: • the service cost, which corresponds to the increase in the obligation The Group records a provision when it recognises a legal or during the reporting period, is recognised in income (loss) from constructive obligation resulting from a past event for which an outflow operations; of resources will be required and a reliable estimate can be made of • the costs of unwinding the net obligation as well as actuarial gains the amount. Provisions are generally recorded for the following: and losses due to changes in assumptions and experience adjustments (difference between projected and actual) are Provisions for post- employment recognised in financial income (expense); and other employee benefits • the impact of plan amendments following renegotiations of The financing of post-employment benefits mainly involves statutory employee benefits is recognised in non- recurring income (expense). retirement schemes (social security, supplementary schemes such as ARRCO and AGIRC, etc.) for which the recognised expense is equal to Provisions for subsidiary risks the contributions paid. These are recorded in the year in which they are incurred. Equity investments held by Thales are measured at the end of each reporting period and an impairment loss is recorded if necessary. In the event that The Company grants its employees termination payments and other the investment is fully written down and Thales’s share in the shareholders’ long- term benefits (long- service awards and an additional week of equity of the subsidiary or associate becomes negative, a provision for annual leave during the employee’s 35th year of service within the Group). subsidiary risks may be recognised when considered necessary. Some senior executives also benefit from a supplementary pension plan. In accordance with ANC Regulation 2013-02, a provision is Provisions for restructuring recognised for obligations that qualify as defined benefit plans. It is Provisions for restructuring costs are recorded when a restructuring calculated on the basis of an actuarial valuation, determined using the programme has been agreed with a third party, approved by projected unit credit method and taking into account future salary levels. Company management and announced before the reporting date, This method consists in assessing, for each employee, the present value resulting in an obligation to the third parties in question, and for which of the benefits that he or she can expect at the due date, by applying the Company does not expect any consideration for the costs. assumptions concerning discount rates, inflation, mortality and staff turnover.

17.2 Breakdown of provisions

31 / 12 /2016 Increase Reversal 31/ 12 / 2017

Post- employment and other employee benefits (see Note 17.3) 105.1 18.3 (13.1) 110.3 Subsidiary risks 10.8 14.9 (9.9) 15.8 Restructuring 8.3 0.1 (8.1) 0.3 Free shares 18.1 7.8 (7.5) 18.4 Other 55.5 0.3 (1.6) 54.2 TOTAL 197.8 41.4 (40.2) 199.0

106 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

17.3 Post-employment and other employee benefits

The provisions in the balance sheet can be analysed as follows:

2017

Post- Other Total employment employee benefits benefits

Provisions at 31 December 2016 (101.6) (3.5) (105.1) Net increase in provisions of which: (5.0) (0.2) (5.2) Current service cost (5.2) (0.2) (5.4) 1 Financial expense: (10.4) (0.1) (10.5) • Net interest cost (1.5) (0.1) (1.6) • Actuarial gains (losses) (8.9) – (8.9) Benefits and contributions paid 10.1 0.2 10.3 Other 0.5 (0.1) 0.4 Provisions at 31 December 2017 (106.6) (3.7) (110.3)

Of which: • Commitments (156.4) (3.6) (160.0) • Investments 49.7 – 49.7

The actuarial assumptions used to estimate the commitments are the following:

31 / 12 / 2017 31 / 12 / 2016

Discount rate 1.20% 1.50% Inflation rate 1.35% 1.40% Average salary increase rate 2.20% 2.38% Expected average remaining working life 8 years 7 years

2017 Registration Document — THALES 107 2017 Financial Information — Parent company management report and financial statements

NOTE 18. LEGAL AND ENVIRONMENTAL RISKS

18.1 Legal risks 18.2 Environment

Due to the nature of its business, Thales is exposed to the risk of Due to the nature of its business, Thales is exposed to environmental technical and commercial disputes. risks related to potential adverse environmental and health effects resulting from its activities, the impact of the environment on its To prevent disputes or limit their impact, Thales’s policy is to operations and non-compliance with new regulations applicable to its systematically seek alternative dispute resolution mechanisms. This activities and products. policy is reviewed on a regular basis to take into account changes in the Group’s core areas of business and is backed by employee training For many years, Thales has regularly analysed and updated its programmes. environmental risks on the basis of its business activities, scientific and technical developments and emerging environmental challenges. In addition, Thales implemented a procedure several years ago to centralise all civil, commercial and criminal litigation and claims. These This analysis, represented by a risk mapping, is intended to: are handled by the Corporate Legal Affairs department, with the ensure that employees and local residents are not exposed to health support of the Group companies concerned. • and environmental risks; In October 2017, Thales was notified of an arbitration award relating ensure the compliance of activities and products; to a commercial dispute between the Republic of China and a group of • three French manufacturers, including Thales Systèmes Aéroportés, a • analyse the impact of new regulations, including on product design; subsidiary of Thales. • identify an appropriate organisational structure and associated This arbitration award, which falls under a contract concluded in 1992, action plans, either at Group level or locally, according to the risk gives rise to a financial conviction of the entities. The total amount of the mapping results. award, including interest, is €227 million. The share of Thales In support of this analysis, an environmental management system has Systèmes Aéroportés amounts to €64 million. The corresponding been deployed at all sites in order to ensure the control and limitation of charge was recorded in the accounts of the subsidiary as at the environmental impacts of the Group’s products and activities. This 31 December 2017. management system is deployed throughout the different business lines There are no other government, judicial or arbitration claims, of which as part of the Group’s framework. Consequently, environmental skills the Group is aware, which are pending or threatened, which could and know- how have been rolled out to services such as engineering, have, or which had, in the course of the last 12 months, any significant research, procurement and contracts. effect on the financial position or the profitability of the Company At 31 December 2017, provisions for environmental risks amounted to and / or the Group. €0.5 million.

108 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

NOTE 19. OFF- BALANCE SHEET COMMITMENTS

19.1 Deposits and guarantees

Commitments given: 31 / 12 / 2017 31 / 12 / 2016

Guarantees given by Thales under commercial contracts signed by operating entities 8,769.6 9,828.7 Guarantees given to banks for facilities granted to subsidiaries 2,314.0 2,216.9 Counter- guarantee given to trustees to hedge pension obligations in the United Kingdom 930.8 974.0 1 Other guarantees given to Group subsidiaries 704.7 801.8 Other guarantees given to third parties 746.0 677.5 Total (a) 13,465.1 14,498.9 Of which, related to direct subsidiaries (see Note 23) 3,655.3 4,576.4 Of which, related to other Group subsidiaries 9,487.9 9,632.8 Of which, related to direct and indirect associates 321.9 289.8

Commitments received 31 / 12 / 2017 31 / 12 / 2016

Debt write- offs granted to related companies with clawback provisions 6.9 120.1

(a) The decrease in guarantees given from 2016 to 2017 is explained in part by changes in exchange rates (€704.7 million).

19.2 Property leasing commitments

31 / 12 / 2017 31 / 12 / 2016

Operating leases 544.0 608.4 Less than 1 year 113.9 120.9 From 1 to 5 years 293.6 326.7 More than 5 years 136.5 160.8

2017 Registration Document — THALES 109 2017 Financial Information — Parent company management report and financial statements

NOTE 20. MARKET RISKS

transactions. Foreign exchange premiums are amortised in the income 20.1 Accounting principles statement on a straight- line basis over the term of the hedge. The Thales parent company Treasury and Financing department is When hedged items do not have a sufficient probability of occurrence, active in the financial markets in order to reduce the interest rate and the foreign exchange derivatives are deemed isolated open positions. foreign exchange risks of the Group. In this case, the market value of the derivative is recognised in the balance sheet as an offsetting entry in a suspense account, also in the Interest rate derivatives balance sheet. A provision is recorded in the event of negative valuation. This valuation takes into account Thales’s guarantee Thales uses interest rate derivatives to manage and reduce its exposure commitments to subsidiaries under these offers. to interest rate fluctuations. When the derivatives are designated as hedging instruments, the gains and losses on the hedge are recognised Thales hedges currency risks related to firm contracts and normal in the same period as the hedged item. commercial transactions on behalf of its subsidiaries. As such, it guarantees its operating subsidiaries a specific exchange rate for each Currency derivatives transaction and backs up its position by arranging currency derivatives with banking counterparts. Gains and losses on bank derivatives are Thales hedges currency risks arising on commercial offers entered into then recognised in income at the same rate as the gains and losses by its subsidiaries, which are denominated in currencies other than the realised on the guarantees offered to subsidiaries, in accordance with main operating currency. the principle of symmetry applicable to hedging transactions. When the hedged item has a sufficient probability of occurrence, the Thales hedges the currency risks related to its cash pooling system. The foreign exchange derivatives subscribed by Thales with banking gains and losses on currency derivatives are offset by the gains and counterparties qualify for hedge accounting. Gains and losses on bank losses resulting from the revaluation of the hedged Group company derivatives are then recognised in income at the same rate as the gains current accounts and loans. However, gains or losses related to the and losses realised on the guarantees offered to subsidiaries, in derivatives’ swap points are spread over the term of the hedge. accordance with the principle of symmetry applicable to hedging

20.2 Interest rate risk management

At 31 December 2017 and 2016, Thales held the following derivative instruments, which all qualify as hedges.

31 / 12 / 2017 31 / 12 / 2016

Nominal Market Nominal Market value value Fixed-for- floating interest rate swaps: • swaps backing bonds maturing in 2023 400.0 (2.5) 400.0 0.1 • swaps backing bonds maturing in 2021 300.0 16.9 300.0 21.6 • swaps backing bonds maturing in 2018 300.0 3.1 300.0 6.2 TOTAL 1,000.0 17.5 1,000.0 27.9

Floating-for- fixed interest rate swaps: • swap backing a loan maturing in 2019 5.1 (0.2) 6.3 (0.2) • cross currency swap backing a loan 14.3 1.5 15.2 1.3 TOTAL 19.4 1.3 21.5 1.1

20.3 Currency risk management

At 31 December 2017 and 2016, the derivatives subscribed by Thales with bank counterparties were as follows:

31 / 12 / 2017 31 / 12 / 2016

USD GBP Other Total Market Total Market value value Hedges of commercial offers and transactions: Forward currency sales 3,650.1 878.4 2,382.7 6,911.2 144.3 7,702.3 (179.3) 144.3 Forward currency purchases 1,448.4 992.8 1,928.8 4,370.0 4,163.2 Currency sales (call and put options) 90.9 – 22.3 113.2 – 94.1 0.6 – Currency purchases (call and put options) 111.0 – 1.8 112.8 26.0

Hedges related to cash pooling: Currency sales: foreign exchange swaps 702.0 – 270.3 972.3 (70.3) 1,030.2 (136.1) (70.3) Currency purchases: foreign exchange swaps 1.3 569.6 71.9 642.8 1,474.3

110 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

In addition, Thales has granted its operating subsidiaries “mirror” Thales has also granted its operating subsidiaries foreign exchange foreign exchange guarantees in relation to firm contracts or normal guarantees on commercial offers, subject to the subsidiary winning the commercial operations. contract.

NOTE 21. RELATED PARTIES

21.1 Definition 21.3 Agreements concluded

The Group has identified the following related parties: shareholders of Thales with Naval Group (the parent company), especially the French State and Dassault Aviation, (formerly DCNS) 1 companies controlled by these same shareholders, companies under joint control, companies under significant influence, directors and senior executives. As of December 2011, Thales holds 35% of the share capital of Naval Group, a subsidiary jointly controlled with the French State. Thales and Naval Group also signed an industrial and trade 21.2 Agreements with cooperation agreement, with the objective of optimising the Thales’s shareholders organisation of the naval business activities of both groups (market access, research and development and purchasing). Section 4.3.3.3 of the 2017 Registration Document describes the main provisions of the shareholders’ agreement governing relations between the French State (the “Public Sector”) and Dassault Aviation (the “Industrial Partner”) within Thales, in relation to the convention on the protection of strategic national interests as well as the specific convention binding the French State and Thales.

21.4 Compensation of directors and senior corporate officers (a)

The compensation, benefits and social security contributions awarded to Directors and Executive Committee members break down as follows:

2017 2016

Short-term benefits: • Fixed compensation 4.7 4.3 • Variable compensation 4.2 3.7 • Post- employment benefits 0.5 – • Social security contributions 3.1 2.7 • Attendance fees 0.6 0.5

Other benefits: • Post- employment benefits 2.4 1.7 • Share- based compensation (b) (Note 15) 2.4 2.5

(a) The components of compensation presented correspond to costs recognised in the Thales parent company financial statements. (b) Measured in accordance with IFRS 2 – share- based payments.

NOTE 22. EVENTS AFTER THE REPORTING PERIOD

At the publication date of this document, no event liable to have an impact on Thales’s financial position has occurred since year- end.

2017 Registration Document — THALES 111 2017 Financial Information — Parent company management report and financial statements

NOTE 23. SUBSIDIARIES AND ASSOCIATES

(in millions) Information related to the entity (local currency)

Prior year sales Profit (loss) Share Shareholders’ excluding VAT for last year capital equity other than ended share capital

A. Detailed information on subsidiaries and associates whose gross value exceeds 1% of the Company’s share capital 1. Subsidiaries THALES HOLDING UK PLC GBP 0.0 3.4 726.8 400.1 THALES AVS FRANCE SAS EUR 1 733.1 63.4 213.1 315.8 THALES ALENIA SPACE SAS EUR 0.0 94.5 918.0 298.1 THALES DMS FRANCE SAS EUR 1 797.7 277.3 122.2 138.3 THALES COMMUNICATIONS & SECURITY SAS EUR 2 036.6 100.0 164.0 112.3 THALES DEUTSCHLAND GMBH EUR 0.0 – 5.9 27.1 278.2 THALES USA INC USD 1.9 28.4 118.1 327.3 THALES INTERNATIONAL SAS EUR 0.0 47.7 313.0 22.3 THALES LAS FRANCE SAS EUR 1 881.6 421.8 199.8 210.3 AVIMO GROUP LTD SGD 0.0 0.5 22.1 35.1 THALES NETHERLANDS BV EUR 424.8 29.7 29.5 167.0 THALES UNDERWATER SYST NV PAYS BAS EUR 0.0 0.0 4.5 4.1 THALES SERVICES SAS EUR 445.9 203.3 1.5 13.3 SIFELEC SAS EUR 0.0 0.0 38.3 0.6 THALES AVIONICS ELECTRICAL SYSTEMS SAS EUR 138.8 – 4.7 6.9 45.4 THALES HOLDING NORWAY AS NOK 0.0 0.0 419.8 – 186.8 THALES CORPORATE VENTURES SAS EUR 0.0 0.2 15.0 14.6 THALES CANADA INC CAD 660.8 – 5.4 6.8 – 45.0 THALES EUROPE SAS EUR 0.0 4.7 43.2 – 45.5 TH. BELGIUM SA (Ex FZ) EUR 39.2 0.0 14.2 – 21.4 THALES SUISSE SA CHF 33.1 15.8 40.0 – 3.3 CMT MEDICAL TECHNOLOGIES LTD USD 20.1 1.2 1.0 27.1 SNC THALES MERIGNAC EUR 50.9 2.0 20.0 – 0.4 THALES SESO SAS EUR 21.4 – 0.3 0.4 11.3 THALES GLOBAL SERVICES SAS EUR 541.9 – 4.7 0.5 – 3.6 THALES COMMUNICATIONS LTDA BRL 0.0 – 0.1 19.8 – 0.8 SAS CHATELLERAULT BRELANDIERE EUR 2.8 – 0.1 2.0 1.5 Total subsidiaries

2. Associates UNITED MONOLITHIC SEMICONDUCTORS HOLDING EUR 0.0 3.9 33.9 12.2 ELETTRONICA SpA EUR 0.0 18.1 0.0 74.0 SOFRADIR EUR 142.2 24.6 6.0 82.9 TELESPAZIO SpA EUR 563.7 33.3 50.0 187.8 NAVAL GROUP EUR 3 698.2 136.9 563.0 – 177.0 Total associates

TOTAL (A)

B. Detailed information concerning other subsidiaries and associates 1. Subsidiaries not listed in section A French subsidiaries Foreign subsidiaries Total

2. Associates not listed in section A French companies 9.7 Foreign companies 7.4 Total

TOTAL (B)

TOTAL (A+B)

Information concerning related companies Thales’ direct subsidiaries ( A ) Thales’ direct subsidiaries ( B ) Other Group subsidiaries

112 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

Contribution of subsidiaries and associates to Thales’ financial statements (EUR)

Carrying amount Carrying % share Loans and advances Receivables Liabilities Deposits and Dividends received of investments amount capital held made by Thales guarantees by Thales (gross) (net) not yet paid given by Thales during the year

2 571.7 1 870.1 100 % 0.0 1.7 111.9 0.0 0.0 1 016.0 1 016.0 93 % 0.0 47.4 400.5 128.2 60.9 683.1 683.1 67 % 0.0 0.0 17.3 0.0 114.4 802.6 802.6 100 % 0.0 0.0 2 302.5 687.2 34.7 1 590.8 590.8 100 % 0.0 10.1 375.5 625.2 45.3 545.0 545.0 100 % 0.0 85.0 0.0 0.0 0.0 476.6 476.6 100 % 0.0 37.0 0.7 729.7 0.0 398.5 398.5 100 % 0.0 107.5 33.7 6.0 129.8 754.9 754.9 100 % 0.0 5.1 1 353.3 314.8 100.6 250.7 66.4 100 % 0.0 0.0 0.0 0.0 0.0 235.2 235.2 99 % 0.0 1.1 208.8 382.3 0.0 129.2 8.5 100 % 0.0 0.0 0.0 0.0 0.0 126.4 126.4 100 % 0.0 17.4 0.0 0.8 2.4 111.8 38.7 100 % 0.0 0.0 30.1 0.0 0.0 94.6 61.6 100 % 0.0 49.3 1.0 0.0 0.0 77.2 77.2 100 % 0.0 0.0 0.0 0.0 0.0 73.3 18.7 100 % 0.0 0.0 13.3 0.0 0.0 51.9 51.9 100 % 0.0 96.5 10.7 741.1 0.0 43.2 43.2 100 % 0.0 165.5 0.0 0.0 0.0 34.2 34.2 100 % 0.0 28.1 1.0 38.6 0.0 26.4 26.4 100 % 0.0 0.0 0.0 0.0 7.8 21.8 21.8 100 % 0.0 0.0 0.0 0.0 0.0 20.0 19.7 100 % 0.0 103.5 0.0 0.0 0.0 36.4 11.5 100 % 0.0 0.5 4.6 0.0 0.0 12.4 0.0 100 % 0.0 47.7 0.0 1.4 0.0 11.0 0.0 100 % 0.0 0.0 0.0 0.0 0.0 10.0 2.5 100 % 0.0 0.4 0.0 0.0 0.0 9 204.7 7 981.2 0.0 803.8 4 864.9 3 655.3 495.9

24.3 22.8 50 % 0.0 0.0 0.0 0.0 2.0 26.7 26.7 33 % 0.0 0.0 0.0 0.0 4.6 26.4 26.4 50 % 0.0 0.0 0.0 0.0 5.0 81.6 81.6 33 % 0.0 0.0 0.0 0.0 7.2 833.7 833.7 35 % 0.0 0.0 0.0 0.0 0.0 992.8 991.3 0.0 0.0 0.0 0.0 18.7

10 197.4 8 972.4 0.0 803.8 4 864.9 3 655.3 514.6

23.0 16.8 0.0 36.7 15.3 0.0 2.5 0.7 0.1 0.0 0.0 0.0 0.0 0.0 23.8 16.9 0.0 36.7 15.3 0.0 2.5

9.5 0.0 0.0 0.0 0.0 1.5 0.1 25.5 70.6 0.0 507.0 0.1 17.0 9.6 25.5 70.6 0.0 507.0 1.6

40.8 26.5 25.5 107.4 15.3 507.0 4.1

10 238.2 8 999.0 25.5 911.2 4 880.2 4 162.3 518.8

0.0 803.8 4 864.9 3 655.3 25.5 107.4 15.3 0.0 0.0 507.0

2017 Registration Document — THALES 113 2017 Financial Information — Parent company management report and financial statements

Investments made and thresholds crossed in French companies in 2017

At 31/ 12 / 2016 At 31/ 12 / 2017

Percentage owned > 5% > 20% > 33% > 50% > 66% > 5% > 20% > 33% > 50% > 66%

1. Increases 189 Centelec SAS – – – – 100% – – – – – 190 Centelec SAS – – – – 100% – – – – – 191 Centelec SAS – – – – 100% – – – – – Thales LAS France SAS – – – – – – – – – 100%

2. Decreases Thales Underwater Systems SAS – – – – – – – – – 100% TDA Armements SAS – – – – – – – – – 100% Thales Angénieux SAS – – – – – – – – – 100% Thales Belgium SA – – – – – – – – – 100% Thales Cryogénie SAS – – – – – – – – – 100% Thales Electron Devices SAS – – – – – – – – – 100% Thales Optronique SAS – – – – – – – – – 77% Thales Microelectronics SAS – – – – – – – – – 100% Thales Systems Ireland Ltd – – – – – – 23% – – – Revenue Collection Systems France SAS – – – – – – – – – 100% 191 Centelec SAS – – – – – – – – 100%

114 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

NOTE 24. INFORMATION ON EXISTING BRANCHES (ARTICLE L. 232-1, II OF THE FRENCH COMMERCIAL CODE)

At 31 December 2017, Thales had a secondary facility registered in France with the commercial registry and indicated on its Kbis (company registration certificate).

1.3.2.6 Five- year financial summary of the Company

20 13 20 14 20 15 20 16 2017 1

1. Share capital at year- end Share capital 617.2 623.5 632.9 636.6 638.0 Number of ordinary shares outstanding 205,744,500 207,841,111 210,961,404 212,194,766 212,658,725 Maximum number of shares to be created in future by exercise of share subscription options 8,186,261 5,841,789 2,615,865 1,320,693 783,154

2. Operations and results for the year Revenues excluding tax 205.9 224.4 208.6 233.3 258.5 Earnings before tax, employee profit- sharing, depreciation, amortisation and provisions 379.7 609.3 625.7 367.9 337.4 Income tax benefit 85.8 77.4 93.8 78.0 9.8 Earnings after tax, employee profit- sharing, depreciation, amortisation and provisions 400.6 662.9 871.9 431.1 383.8 Distributed net profit 227.6 230.7 285.6 338.3 95.2 (a)

3. Earnings per share Earnings after tax and employee profit- sharing but before amortisation, depreciation and provisions 2.26 3.30 3.41 2.10 1.63 Earnings after tax, employee profit- sharing, depreciation, amortisation and provisions 1.95 3.19 4.13 2.03 1.80 Net dividend per share 1.12 1.12 1.36 1.60 1.75 (b)

4. Employees Average headcount during the year, of which: 833 852 831 818 812 • Engineers and managers 726 749 735 727 723 • Technicians and supervisors 107 103 96 91 89 Personnel expenses, of which: 177.1 183.2 187.1 191.5 207.7 • Total salary costs for the year 123.9 130.2 131.5 137.8 151.2 • Social security and other social welfare benefits paid during the year 53.2 53.0 55.6 53.7 56.5

2013: Share capital up from €607,019,022.0 to €617,233,500.0 following a capital increase. 2014: Share capital up from €617,233,500.0 to €623,523,333.0 following a capital increase. 2015: Share capital up from €623,523,333.0 to €632,884,212.0 following a capital increase. 2016: Share capital up from €632,884,212.0 to €636,584,298.0 following a capital increase. 2017: Share capital up from €636,584,298.0 to €637,976,175.0 following a capital increase. (a) Interim dividend. (b) Subject to approval by the Annual General Meeting of 23 May 2018.

2017 Registration Document — THALES 115 2017 Financial Information — Parent company management report and financial statements

1.3.3 Statutory auditors’ report on the financial statements

This is a translation into English of the statutory auditors’ report on the financial statements of the Company issued in French and it is provided solely for the convenience of English- speaking users. This statutory auditors’ report includes information required by European regulation and French law, such as information about the appointment of the statutory auditors or verification of the management report and other documents provided to the shareholders. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

To the Annual General Meeting of Thales, • Independence We conducted our audit engagement in compliance with independence Opinion rules applicable to us, for the period from January 1, 2017 to the date In compliance with the engagement entrusted to us by your annual of our report and specifically we did not provide any prohibited general meetings, we have audited the accompanying financial non-audit services referred to in Article 5 (1) of Regulation (EU) statements of Thales for the year ended December 31, 2017. No 537 /2014 or in the French Code of Ethics (Code de déontologie) for statutory auditors. In our opinion, the financial statements give a true and fair view of the assets and liabilities and of the financial position of the Company as at Emphasis of Matter December 31, 2017 and of the results of its operations for the year then ended in accordance with French accounting principles. We draw attention to the matter described in Note 16 “Receivables and Debts” to the financial statements regarding the first- time application The audit opinion expressed above is consistent with our report to the of Regulation 2015- 05 of the French Accounting Standards Authority Audit and Accounts Committee. (Autorité des normes comptables). Our opinion is not modified in respect of this matter. Basis for opinion Justification of assessments – Key audit matters • Audit framework In accordance with the requirements of Articles L. 823- 9 and R. 823-7 We conducted our audit in accordance with professional standards of the French Commercial Code (Code de commerce) relating to the applicable in France. We believe that the audit evidence we have justification of our assessments, we inform you of the key audit matters obtained is sufficient and appropriate to provide a basis for our relating to risks of material misstatement that, in our professional judgment, opinion. were of most significance in our audit of the financial statements of the Our responsibilities under those standards are further described in the current period, as well as how we addressed those risks. Statutory Auditors’ Responsibilities for the Audit of the Financial These matters were addressed in the context of our audit of the financial Statements section of our report. statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on specific items of the financial statements.

Equity investments

Risk identified Our response Equity investments, recorded in the balance sheet as at December 31, In order to assess the reasonableness of the equity investment estimates, 2017 for a net amount of M€ 8,999, represent a significant balance our work mainly consisted in: sheet item. They are recorded at their lower acquisition cost or at their a) For valuations based on underlying asset information: value in use. – comparing the shareholders’ equity used against the financial As stated in Note 8 “Equity investments” to the financial statements, the statements of entities which were subject to an audit or analytical inventory value is is determined based on profitability forecasts, the procedures. underlying assets, recent transactions or the market price of any listed securities. b) For valuations based on forecasts: The estimate of the inventory value of these equity investments requires – assessing the reasonableness of cash flow projections in relation the exercise of the management’s judgment in the choice of information to the economic and financial contexts of each business; to consider depending on the investments concerned. Depending on – assessing the reliability of the process for establishing forecasts by the situation, this information may correspond to historical information reviewing the causes for variances between previous forecasts (shareholders’ equity) or forecast information (value of future discounted and actual figures; cash flows). – comparing the consistency of the cash flow projections with the most recent management estimates presented to the Board of We considered that the correct valuation of equity investments Directors; constituted a key audit matter. – evaluating the consistency of the growth rate used for the projected flows with market analyses and the consensus observed; – evaluating the calculation of the weighted average cost of capital applied to the flow projections. Lastly, we also assessed the appropriateness of the information provided in Note 8 to the financial statements.

116 THALES — 2017 Registration Document Parent company management report and financial statements — 2017 Financial Information

Verification of the management report In preparing the financial statements, management is responsible for and of the other documents assessing the Company’s ability to continue as a going concern, provided to the shareholders disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless it is expected to liquidate We have also performed, in accordance with professional standards the Company or to cease operations. applicable in France, the specific verifications required by French law. The Audit and Accounts Committee is responsible for monitoring the • Information provided in the management report and in the financial reporting process and the effectiveness of internal control and Other Documents provided to the Shareholders with respect to risks management systems and where applicable, its internal audit, the Company’s financial position and the financial statements regarding the accounting and financial reporting procedures. We have no matters to report as to the fair presentation and the The financial statements were approved by the Board of Directors. consistency with the financial statements of the information given in the Board of Directors’ management report and in the other documents Statutory auditors’ responsibilities provided to the Shareholders with respect to the financial position and for the audit of the Financial Statements 1 the financial statements. • Objectives and audit approach Report on corporate governance • Our role is to issue a report on the financial statements. Our objective is We confirm that the Board of Directors’ Report on Corporate to obtain reasonable assurance about whether the financial statements Governance sets out the information required by Articles L. 225-37- 3 as a whole are free from material misstatement. Reasonable assurance and L. 225-37- 4 of the French Commercial Code (Code de is a high level of assurance, but is not a guarantee that an audit commerce). conducted in accordance with professional standards will always detect a material misstatement when it exists. Misstatements can arise Concerning the information given in accordance with the requirements from fraud or error and are considered material if, individually or in the of Article L. 225- 37- 3 of the French Commercial Code (Code de aggregate, they could reasonably be expected to influence the commerce) relating to remunerations and benefits received by the economic decisions of users taken on the basis of these financial directors and any other commitments made in their favor, we have statements. verified its consistency with the financial statements, or with the underlying information used to prepare these financial statements and, As specified in Article L. 823-10- 1 of the French Commercial Code where applicable, with the information obtained by your Company (Code de commerce), our statutory audit does not include assurance on from controlling and controlled companies. Based on this work, we the viability of the Company or the quality of management of the affairs attest the accuracy and fair presentation of this information. of the Company. With respect to the information relating to items that your Company As part of an audit conducted in accordance with professional considered likely to have an impact in the event of a public purchase standards applicable in France, the statutory auditors exercises offer or exchange, provided pursuant to Article L. 225- 37- 5 of the professional judgment throughout the audit and furthermore: French Commercial Code (Code de commerce), we have verified that Identifies and assesses the risks of material misstatement of the it is in accordance with the underlying documentation provided to us. • financial statements, whether due to fraud or error, designs and Based on our work, we have no observations to make on this performs audit procedures responsive to those risks, and obtains information. audit evidence considered to be sufficient and appropriate to provide a basis for his opinion. The risk of not detecting a material Other information • misstatement resulting from fraud is higher than for one resulting from In accordance with French law, we have verified that the required error, as fraud may involve collusion, forgery, intentional omissions, information concerning the purchase of investments and controlling misrepresentations, or the override of internal control. interests and the identity of the shareholders and holders of the voting Obtains an understanding of internal control relevant to the audit in rights has been properly disclosed in the management report. • order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on Report on other legal the effectiveness of the internal control. and regulatory requirements • Evaluates the appropriateness of accounting policies used and the • Appointment of the statutory auditors reasonableness of accounting estimates and related disclosures made by management in the financial statements. We were appointed as statutory auditors of Thales by the ordinary and extraordinary Annual General Meeting held on June 25, 1983 for • Assesses the appropriateness of management’s use of the going MAZARS and on May 15, 2003 for ERNST & YOUNG Audit. concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or As at December 31, 2017, MAZARS was in the 35th year and ERNST & conditions that may cast significant doubt on the Company’s ability YOUNG Audit in the15th year of total uninterrupted engagement. to continue as a going concern. This assessment is based on the audit evidence obtained up to the date of his audit report. However, Responsibilities of Management future events or conditions may cause the Company to cease to and those charged with Governance continue as a going concern. If the statutory auditor concludes that a for the Financial Statements material uncertainty exists, there is a requirement to draw attention in Management is responsible for the preparation and fair presentation of the audit report to the related disclosures in the financial statements the financial statements in accordance with French accounting or, if such disclosures are not provided or inadequate, to modify the principles and for such internal control as management determines is opinion expressed therein. necessary to enable the preparation of financial statements that are free • Evaluates the overall presentation of the financial statements and from material misstatement, whether due to fraud or error. assesses whether these statements represent the underlying transactions and events in a manner that achieves fair presentation.

2017 Registration Document — THALES 117 2017 Financial Information — Parent company management report and financial statements

• Report to the Audit and Accounts Committee We also provide the Audit and Accounts Committee with the declaration provided for in Article 6 of Regulation (EU) No 537/ 2014, We submit a report to the Audit and Accounts Committee which confirming our independence within the meaning of the rules includes in particular a description of the scope of the audit and the applicable in France as set out in particular in Articles L. 822-10 to audit program implemented, as well as the results of our audit. We also L. 822-14 of the French Commercial Code (Code de commerce) and report significant deficiencies, if any, in internal control regarding the in the French Code of Ethics (Code de déontologie) for statutory accounting and financial reporting procedures that we have identified. auditors. Where appropriate, we discuss with the Audit and Accounts Our report to the Audit and Accounts Committee includes the risks of Committee the risks that may reasonably be thought to bear on our material misstatement that, in our professional judgment, were of most independence, and the related safeguards. significance in the audit of the financial statements of the current period and which are therefore the key audit matters that we are required to describe in this report.

Courbevoie and Paris- La Défense, March 5, 2018 The Statutory Auditors (French original signed by) Mazars Ernst & Young Audit Anne-Laure Rousselou Philippe Diu Jean-Marc Deslandes Serge Pottiez

118 THALES — 2017 Registration Document 2017 Financial Information

This page has been intentionally left blank.

1

2017 Registration Document — THALES 119 BUSINESS REVIEW 2

120 THALES — 2017 Registration Document 2

2.1 OPERATING SEGMENTS 122

2.1.1 Aerospace segment 122 2.1.2 Transport segment 125 2.1.3 Defence & Security segment 126 2.2.1 Research and development, the key to competitiveness and growth 130 2.2.2 Four key technical domains 130 2.2.3 Thales at the heart of innovation ecosystems 131 2.2.4 A dynamic approach to intellectual property management 132

2.3 RELATIONS BETWEEN THALES AND ITS SUBSIDIARIES 133

2.3.1 Simplified organisational chart at 31 December 2017 133 2.3.2 Role of Thales (parent company) within the Group 134 2.3.3 Financial flows between Thales (parent company) and its subsidiaries 134

2.4 INFORMATION ABOUT MAJOR OPERATIONAL SUBSIDIARIES AND MANUFACTURING SITES 135

2.4.1 List of main consolidated companies 135 2.4.2 Major manufacturing sites 137

2017 Registration Document — THALES 121 Business review — Operating segments

2.1 OPERATING SEGMENTS

The Group has a matrix organisation based on: • six Global Business Units, grouped into three operating segments: • an international organisation split into the major industrial countries Aerospace (Avionics, Space), Transport (Ground Transportation Systems) in which the Group is present (Germany, France, the Netherlands, and Defence & Security (Secure Communications and Information the United Kingdom, Canada, the United States and Australia), Systems, Land and Air Systems, and Defence Mission Systems); other European countries and emerging markets.

2.1.1 Aerospace segment

The Aerospace segment includes the Avionics and Space Global The Space Global Business Unit offers space systems and solutions, Business Units. particularly in the fields of telecommunications, radar and optical observation of the Earth, satellite navigation and exploration of the The Avionics Global Business Unit offers a large array of equipment and Universe. The strategic partnership in the space sector between Thales functions for piloting, navigation and aircraft control systems, electrical and Leonardo – the Space Alliance – responds to the significant generation and conversion, and in- flight entertainment and connectivity environmental, scientific and security challenges faced by the sector as systems. This activity also includes simulation and training solutions for well as the changes brought about by the expansion of the information military aircraft and civilian and military helicopters as well as microwave society. It is based on the solutions offered by both Thales Alenia Space and imaging subsystems. As a partner of the major aircraft manufacturers (67% owned by Thales, 33% owned by Leonardo) in satellite and airlines, Thales is a player across the entire value chain for the manufacturing and by Telespazio (33% owned by Thales, 67% owned aviation sector, in addition to its air traffic management business. by Leonardo) in related services.

2.1.1.1 Key data

(in € millions) 2017 2016 Sales by segment

Order book at 31 December 8,850 9,914 Aerospace 38% Order intake 5,200 5,872

Sales 5,985 5,812 Defence & Security 51% EBIT (a) 601 571 Employees under Group management 18,772 18,741 Transport 11% (a) Non-GAAP indicator. See definition in the section entitled “Presentation of Financial Information” on pages 8 and 9.

2.1.1.2 Avionics • Passenger experience: Airlines call upon Thales to personalise the services they offer to their passengers through the latest generation of onboard multimedia systems supported by high-speed connectivity. 2.1.1.2.1 General overview Thales also makes use of the latest technology in data analytics to enable companies to access new sources of revenue generated by Thales supports aircraft manufacturers, the armed forces, airlines, specific applications offered to passengers depending on their profile. operators, pilots, crews and passengers to improve flight efficiency, In addition, the Group offers cabin lighting and aircraft interior safety and comfort. The secure, natively connected systems designed systems, provided through Diehl Aerospace. by Thales allow aircraft to fly in all circumstances and to interface all elements of the aeronautic ecosystem, on the ground or in flight. • Simulation and training: simulator training for pilots of military aircraft and civilian and military helicopters prepare them more effectively The range of avionic equipment, systems and applications covers four for their missions while reducing training costs. Thales provides main areas: the flight simulators for many European and Australian defence • Piloting and control of the aircraft: information display solutions programmes, as well as training and instruction services. in cockpits are equipped with simplified “human-system” interfaces Thales also provides electric power generation and conversion solutions, for optimised flight management and conduct and a permanent and electric motors, in addition to power amplification and X- ray imaging connection with airlines and air traffic control. solutions for the space and defence industries and the medical sector. • Support and services: the digital solutions Thales offers simplify the tasks to be performed by the pilot and enable fleets to be tracked in real time in order to optimise operating costs and increase aircraft availability.

122 THALES — 2017 Registration Document Operating segments — Business review

2.1.1.2.2 Competitive position 2.1.1.3 Space

As one of the leading players in the avionics market alongside 2.1.1.3.1 General overview Honeywell and Rockwell Collins, Thales supplies the commercial and military aircraft manufacturers Airbus, ATR, Bell, Boeing, Bombardier, Thales Alenia Space, a joint venture between Thales (67%) and Cessna, Dassault Aviation, Embraer, Gulfstream, Leonardo, NHIndustries, Leonardo (33%), forms the Space Alliance with Telespazio to offer a full Sikorsky and Sukhoi. range of solutions including services. For over forty years, Thales Alenia In the in- flight entertainment segment, Thales is one of the top two Space has designed, integrated, tested, operated and delivered players, with Panasonic Avionics. innovative space systems to meet its customers’ needs in terms of telecommunications, navigation, Earth observation and management of The Group has numerous competitors in the simulation solutions market, the environment, exploration, science and orbital infrastructures. On the particularly American defence companies such as Lockheed Martin, strength of unique expertise in dual missions, constellations, high-speed Raytheon and L3Com. flexible payloads, altimetry, meteorology, optical observation, Thales continues to be a global market leader in microwave and high-resolution radar and space exploration, Thales Alenia Space has imaging subsystems, and its main competitors in these markets are been able to capitalise on its heritage while placing innovation at the Varian Medical Systems, CPI and L3. heart of its strategy, in a digital, connected world in a state of flux. Thales Alenia Space offers a full range of solutions which meet 2.1.1.2.3 Significant events in 2017 demands for planetary constellations, the supply of very high-speed geostationary satellites for connectivity purposes in particular, and the In commercial avionics, Thales won contracts with Airbus for the integration of a space component into 5G. supply of flight control computers and probes. The latest standard in A key participant in environmental programmes avionics, known as standard 3, co- developed by ATR and Thales for ATR- 600 regional aircraft was certified by the EASA in July 2017 Thales Alenia Space’s renowned expertise in high- resolution (sub-metric) before its commissioning at the end of 2017. The Thales Pad connected optical and radar payloads for military, civilian or dual missions covers portable electronic solution was selected by more than 20 airlines to a wide range of uses, including information gathering, target optimise their operations on Boeing, Airbus and Sukhoi aircraft. designation, meteorology, altimetry, oceanography, climatology, cartography and crisis management. Thales Alenia Space satellites 2 AirAsia selected Thales for the supply of avionic equipment and the help provide a better understanding of planet Earth and how to protect maintenance of its 304 A320neo. The Brazilian company Azul also it In this market segment, alternative solutions are beginning to emerge chose an avionic equipment package for its fleet of 58 A320NEO. comprising low- orbit high- revisit constellations or products complementary For the eleventh year running, Thales has consolidated its position in to satellites such as HAPS (High Altitude Platforms) for instance. offering support to airlines, ranked third best supplier in the annual In conjunction with its involvement in the continuity of the European Airbus rankings and number one in Airbus’ supplier evaluation. Copernicus programme and its Sentinels, and in the 3rd generation of Meteosat, Thales Alenia Space and Telespazio (through the Space In military avionics, Thales won a major software development contract Alliance) invest in high revisit solutions. for Rafale India. 2017 also saw the launch of the in- flight testing campaign for the first French A330MRTT, for which Thales is a major partner At the forefront of the origins of the Universe of Airbus Defence and Space. and deep space exploration As regards in-flight entertainment, 2017 saw the commissioning of the The International Space Station has generated new needs in terms of AVANT® system on Japan Airlines’ Boeing 787- 9 Dreamliners. refuelling for the astronauts on board and future projects beyond Earth Meanwhile, SES and Hughes announced the signature of strategic are under consideration. Thales Alenia Space manages key agreements aimed at optimising the availability of the in-flight connectivity technologies for the ISS: 50% of its pressurised module, ATV refuelling service FlytLIVE™, the most efficient to date to cover the Americas. cargo spacecrafts. In parallel, Cygnus validated atmospheric re- entry technologies with the success of the IXV mission while vehicles of the In training and simulation, Thales secured an order for two additional future such as Space Rider and soon the spacecraft Orion, rally teams flight simulator models for Airbus A400M, bringing the total number of for new challenges. Thales Alenia Space also plays a central role in the orders to eight. adventure of future scientific missions through the programmes ExoMars Haite Group, a Chinese leader in the supply of aeronautical services, 2020, Solar Orbiter, Bepi Colombo, Juice, Euclid and NEXT- Step- 2. opened its new training centre in Tianjin with the Reality- H EC135 helicopter At the forefront of geolocation and navigation systems simulator designed by Thales, who was selected for the first time in China. Airbus Helicopters chose Thales to equip the crews of Caracal helicopters in Thales Alenia Space remains the European centre of excellence in the the Kuwaiti forces with a Reality-H mission simulator in addition to two field of Satellite navigation systems (EGNOS, Galileo) and at the cutting coaching positions in tactical flying and training procedures. edge of geolocalisation solutions including Argos NEO and its station MEOLUT Next dedicated to “Search and Rescue” services. With regard to electrical systems, Safran Landing Systems and Thales decided to combine their expertise to develop an electrical taxi system At the cutting-edge of innovation for aircraft. Thales Alenia Space is developing the Stratobus, an autonomous In imaging and microwave subsystems, Thales was selected to supply stratospheric airship that is complementary to satellite solutions and is the first Ku-band tubes for use in a telecommunications satellite. In the designed for regional telecommunications, surveillance and environmental radiology field, Siemens stepped up the promotion of the product applications. ARTPIX EZ2GO developed by Thales which enables hospitals to Services for European launchers optimise the cost of ownership of their medical imaging systems while simplifying the work of their employees. Finally, the most powerful Thales Alenia Space contributes to the European policy on access to free-electron laser in the world was inaugurated in Hamburg. Thanks to space by supplying the on- board electronics for the Ariane rocket, the the energy supplied by the klystrons and couplers manufactured by safeguard subsystem of the Soyuz launchers in French Guiana and Thales, this new system will revolutionise the study of the nanoworld. soon that of the Ariane 6 for which the Company will also supply the telemetry transmitter.

2017 Registration Document — THALES 123 Business review — Operating segments

2.1.1.3.2 Competitive position Alenia Space in Spain was entrusted with the communication transponders for the Indian TEAMINDUS and the Korean KPLO (Korea We are witnessing a real transformation of the space sector triggered Pathfinder Lunar Orbiter) lunar missions. not only by the ruptures caused by the world of launchers (SpaceX) In exploration, Thales Alenia Space signed the preliminary development but also by the new requirements in terms of satellite applications and contract with the European Space Agency for Space Rider, a new in particular by the appearance of new requirements in terms of generation European reusable transport system from low orbit and is mega-constellations. New initiatives are coming to light, innovation is taking part in NASA’s NEXTStep- 2 adventure, to support manned becoming increasing daring and the turnaround times for development space flights in proximity to the moon. and marketing new concepts are reducing significantly. The major operators are reflecting on the most optimised solutions to address the In observation and geolocalisation, Thales Alenia Space won the contract new requirements of end users. The complementarity of satellite services for the Argos NEO instrument for the nano-satellite demonstrator Angels from different orbits is becoming an increasingly considered option. for geolocalisation data collection. In addition, the MEOLUT Next solution, integrated into Cospas-Sarsat’s Search & Rescue system was In the commercial satellite segment, Thales Alenia Space’s main awarded by the SSPI (Space & Satellite Professionals International) in competitors are Space Systems / Loral, Airbus Group, Orbital ATK, Boeing the “Humanitarian” category for its contribution to saving lives. and Lockheed Martin. It is important to also count on the gradual arrival in the commercial market of new international players (from Russia, In the field of launchers, Thales Alenia Space in Belgium supplied the China, India, Israel, Japan, etc.) in the fields of telecommunications and nozzle activation system for the Ariane 6 launcher while Thales Alenia observation. Space in Spain will deliver the telemetry transmitter. The leading competitors in the commercial and military institutional In 2017, Thales Alenia Space participated in the following thirteen market in Europe, which is to a large extent dependent on the budgetary launches: Five telecommunication satellites (Telkom 3S, SGDC, Koreasat situation of governments, are Airbus Group and OHB – which are also 5A and 7, HellaSat 3 / Inmarsat-S EAN), two Cygnus cargo spacecraft, sometimes partners on some programmes – as well as Boeing and Lockheed one observation satellite (Mohamed VI satellite), one telecommunication Martin for export contracts. payload (REDSAT) and one scientific instrument (Hexapod), 40 satellites for the Iridium NEXT constellation in batches of ten. 2.1.1.3.3 Significant events in 2017 In 2017, Thales Alenia Space announced the creation of a new automated production site dedicated to the assembly of photovoltaic In telecommunications, Thales Alenia Space signed a contract with cells for solar panels on satellites in Belgium and the opening of a Inmarsat for the construction of Inmarsat GX, a very- high-throughput shared Optical Systems and On- board Instrumentation (Systèmes satellite (VHTS) offering capacity in the Middle East, Europe and the Optiques et Instrumentation Embarquée or SOIE) laboratory with Indian Sub- continent. The payload will be integrated in a transparent the marseille Astrophysics Laboratory (LAM in French). The company way into Inmarsat Global Xpress’ (GX) existing high throughput network. also formalised a minority interest in Airstar Aerospace to secure the Another highlight of 2017 has been the deployment of the Iridium NEXT development of the Stratobus programme. Through its involvement in the constellation with 40 satellites already launched and the placing on the Space Alliance, Thales Alenia Space and Telespazio joined forces market of fully digital payloads. through a memorandum of understanding with the US company Spaceflight to respond to the very- high revisit and low orbit Earth In Earth observation, Thales Alenia Space won an equipment contract observation constellations market. for the Biomass mission dedicated to the study of carbon, and a contract for the integration in the United Kingdom of the MicroCarb Thales Alenia Space launched its digital transformation and entered the

satellite dedicated to the measurement of CO2, the main greenhouse industry 4.0 (smart factory) era, particularly with the introduction of gas responsible for climate change. robots and cobots in industrial processes, a record number in parts made using 3D manufacture (more than 1000) in orbit, the use of virtual In science, Thales Alenia Space in the United Kingdom was entrusted and augmented reality, automated production chains and the creation with a study for the design of the payload module for the SMILE (Solar of digital twins for future satellites. Wind Magnetospheric Ionospheric Link Explorer) mission, while Thales

124 THALES — 2017 Registration Document Operating segments — Business review

2.1.2 Transport segment

2.1.2.1 Key data

(in € millions) 2017 2016 Sales by segment

Order book at 31 December 4,391 4,567 Aerospace 38% Order intake 1,780 1,504

Sales 1,761 1,603 Defence & Security 51% EBIT (a) 72 11 Employees under Group management 7,005 6,812 Transport 11% (a) Non-GAAP indicator. See definition in the section entitled “Presentation of Financial Information” on pages 8 and 9.

2.1.2.2 Ground Transportation In Cairo, where Thales has provided monitoring, communications and Systems security solutions for over 30 years, a new contract was won for phase 4B of line 3. In London, Thales continued to roll out the new signalling system for 4 2.1.2.2.1 General overview metro lines; the Circle, District, Hammersmith & City and Metropolitan lines which represent 40% of the London network. The first tests The Group is one of the foremost global players in railway signalling 2 involving the release into circulation of several test trains were and control/ monitoring systems. It also offers ticketing solutions. completed successfully. In its three domains, Thales provides systems for urban transport In the rest of the world, Thales continued to successfully Commission networks (metros and trams) and mainline networks (conventional, CBTC (Communications-based train control) lines: in India, in high-speed and freight). Thales capitalises on its expertise in the field of Hyderabad, in Chile with line 6 in Santiago, and in the United States critical information systems and cybersecurity to offer transport network with the Disney line. operators integrated and protected solutions to effectively supervise and control their operations. The systems provided by Thales also contribute to For mainline integrated signalling, communications, security and increasing the security of its customers’ passengers, staff and infrastructure. monitoring activities: In Egypt, Thales will modernise the signalling and telecommunications 2.1.2.2.2 Competitive position of the mainline networks in the 180 km stretch which connects the cities of Assyut and Nagh Hammadi. The three-year project is part of the Specialised in intelligent critical systems and services, Thales sets itself Egyptian rail infrastructure transformation programme, financed by the apart from its “generalist” competitors, who offer product ranges World Bank; this new success comes on the back of the project to dominated by rolling stock. The rapid digitisation of railway transport modernise the Cairo/ Alexandria line, currently under deployment by products, solutions and operations has made Thales a recognised Thales. leading player with strong positions in these markets. Thales also signed the contract for the maintenance of the signalling In signalling, Thales is a key player, and its main competitors are and telecommunications systems of the “North South Railway Project” in Siemens, Alstom, Ansaldo STS, Bombardier Transport and China Saudi Arabia, the longest railway line in the world to be equipped with Railway Signal & Communication (CRSC). cutting-edge technology signalling systems, through an initiative in line with the Vision 2030 plan. In Eastern Europe, Thales continued to deploy the ETCS signalling system for the modernisation of the rail 2.1.2.2.3 Significant events in 2017 network in Poland, Romania and Hungary. For urban integrated signalling, communications, security and On the African continent, Thales won a contract in Senegal for the monitoring activities: signalling, telecommunication systems, security and monitoring of the TER “Train Express Régional” connecting Dakar city centre with the new Thales is continuing its expansion in Asia and had two new successes international airport (55 km). in Taiwan: Thales will supply the signalling and communication systems and equipment for the operational control centres for the extension of In France, in a record time of 27 months Thales designed and the Kaoshiung tramway and for the future Ankeng tramway programme. constructed the new Ardoines signal box on behalf of the SNCF. Commissioned in June, this technical centre is a strategic link in the Thales also won its first contract in Vietnam for the provision of a Île- de-France rail network. complete telecommunications, security and monitoring system for line 3 of the Hanoi metro. In ticketing and road tolls, Thales was selected to install new tolling equipment on 38 lanes of the motorway from Mexico to Puebla. In China, through its Thales SAIC Transportation System (TST) joint venture, Thales won a contract for the signalling of the first automatic Thales pursued its development in Egypt, winning two new ticketing driverless metro line (line 14) in the megalopolis of Shanghai. In 2017, contracts to equip 19 new metro stations in Cairo and in Thailand, in addition TST also commissioned the signalling systems for eight metro lines. to the Blue metro line in Bangkok. In Dubai, Thales was once again selected for the extension and modernisation of the red metro line, one of the longest driverless metro lines in the world. It will transport the 25 million expected visitors to the 2020 World Expo.

2017 Registration Document — THALES 125 Business review — Operating segments

2.1.3 Defence & Security segment

2.1.3.1 Key data

(in € millions) 2017 2016 Sales by segment

Order book at 31 December 18,605 18,973 Aerospace 38% Order intake 7,883 9,063

Sales 7,983 7,390 Defence & Security 51% EBIT (a) 869 787 Employees under Group management 34,011 33,282 Transport 11% (a) Non-GAAP indicator. See definition in the section entitled “Presentation of Financial Information” on pages 8 and 9.

2.1.3.2 Secure communications customers (France, NATO, Export), the Group also responds to and information systems growing security needs for critical infrastructures such as airports and other particularly sensitive sites. All of these systems are intended to enable the fastest and most relevant decision-making, whether it is 2.1.3.2.1 General overview automatic or by operators. Based on intelligence of the situation, thanks to a multitude of sensors, they offer users real-time, precise The armed forces, security forces and essential operators rely on Thales information on their environment and the effects of actions taken; for their interoperable and secure information and telecommunications • critical information systems and cybersecurity: States, essential systems. Central to the defence-security continuum, these activities, operators and companies in general are enlisting in a digital which include radiocommunications, networks, protection systems, transformation process to boost their efficiency, reactivity and critical information systems and cybersecurity, respond to the needs of profitability. As a European leader in cybersecurity and a global markets in which the use of new digital technologies such as 4G leader in data protection, Thales contributes to ensuring a secure networks, cryptography, cloud computing, artificial intelligence and big digital transformation for its customers thanks to its management of the data are of the utmost importance. Thales is present throughout the design and operation of critical information systems. Thales supports value chain, from equipment through to systems and systems of systems, its customers in the secure design of their IS or their Cloud hybridation as well as logistical support and related services. projects and proposes solutions to protect their applications, their These activities are developed around four segments: communication networks and their sensitive or classified data against cyber threats. In addition, Thales offers solutions for organisations to • radiocommunications products: Thales designs radios and embedded train and instruct their teams in cyber risks, to anticipate threats, detect and tactical communications systems for all three sectors (land, air the most advanced IT attacks and identify solutions. and sea), identification friend or foe (IFF) systems, radio navigation systems and solutions for electronic communications warfare. The armed forces of more than 50 countries around the world are equipped with 2.1.3.2.2 Competitive position Thales solutions. The Group is a major player in the development of interoperable, secure Software- Defined Radio (SDR) solutions and is Thales has a variety of competitors depending on the business and the prime contractor for the French army’s CONTACT programme; market concerned. • network and infrastructure systems: Thales designs, supplies, In defence applications – radiocommunications, networks, and deploys, supports and operates fixed or mobile communications command and control – the main competitors are predominantly networks for the defence and security forces, and critical American: Harris, General Dynamics, Raytheon and Rockwell Collins. infrastructure operators. Its resilient, secure systems rely on the full Israel- based Elbit Systems is also a competitor in the area of integrated range of military and commercial technology. In France, Thales command and communication solutions. In Europe, the Group’s main provides the renovation of Defence communication systems through competitors are Airbus Group and – particularly in the the Descartes programme, the renovation of networks linked to radiocommunications sector – Rhode & Schwarz, Leonardo and Aselsan. nuclear dissuasion and support to the information system of the In security, Thales’s competitors are primarily coming from the aeronautic Ministry of the Armed Forces. In addition, the Group also operates and defence sector (Boeing, Northrop Grumman, Honeywell, Airbus communication systems in theatres of operation in Afghanistan, Mali Group, etc.), the equipment sector (such as Siemens and Johnson- Tyco), and the Central African Republic. Thales also offers satellite or from services (INEO, etc.) and information systems (including IBM, communication ground systems, in France with the Syracuse programme Atos and Capgemini). The latter are also competitors of Thales in and also for export; critical information systems. • protection systems: as a European leader in the digitised battlefield, Finally, in cybersecurity, Thales is in competition with companies such as Thales develops information, command and intelligence systems for RSA and Gemalto in the commercial segment and BAE Systems, Ultra the armed forces (military functions known as C4ISR – Computerized, Electronics, Airbus Group and Secunet in defence, and also Atos, Sopra Command, Control, Communications, Intelligence, Surveillance and Steria and Cap Gemini in the field of Digital Services Companies. Reconnaissance). Based on this technology developed for its military

126 THALES — 2017 Registration Document Operating segments — Business review

2.1.3.2.3 Significant events in 2017 In the field of critical information systems and cybersecurity In France, in the public sector, Thales was chosen to support the secure In the field of radiocommunication products, the French software- digital transformation of major public players, such as the Ministry of defined radio programme CONTACT designed for the land, air and Internal Affairs, the Ministries of Solidarity and Health, Employment, sea armed forces continues, particularly with the launch of Education and Sports, as well as the ACOSS (Central agency for developments of the airborne component designed primarily for the social security bodies) and IGN (National geographic institute). These combat aircraft RAFALE. In parallel, Thales completed the first part of the missions relate in particular to the development of new digital services development of SYNAPS, the CONTACT export version, and has and the integration of applications into the ministerial Cloud. The La Poste unveiled operational advances for collaborative and high throughput Group and Thales also announced a 12- month trial aimed at testing the combat to its main European and global customers. implementation of new legal provisions in cybersecurity including the The Group was chosen by the US army to equip new brigades with the deployment of the confidence probe for the detection of cyber attacks. hand-held two- channel radio IMBITR. Thales also received orders from On the global stage, Thales performed the security assessment for the several countries for SOTAS vehicular communication systems. contactless payment application Samsung Pay on the smartphones In aeronautics, a high level of activity was maintained with the order for Galaxy S8 and S8+, which resulted in certification of the application the production of the CNI (communications, navigation, identification) on the two devices. suite for the Rafale combat aircraft for India, and the order of a In addition, Thales opened two centres of excellence in cybersecurity in very-high- throughput connection solution for a country in the Middle East. Cambridge and Toulouse and also opened a new cybersecurity In naval communications, Thales received an order for the development monitoring centre in Hong Kong, and a cyber training facility in Belgium. of mid-size frigate (FTI or Frégates de taille intermédiaire in French) communications. The Group will also supply the communications electronic warfare system, and a new generation of identification 2.1.3.3 Land and air systems equipment (IFF). In the United Kingdom, Thales secured a major contract to support the communication systems for several Royal Navy 2.1.3.3.1 General overview vessels. In Germany, Thales was selected for the communications of frigate K130. Thales systems and equipment help to make the airspace safer and In networks and infrastructure systems, Thales launched on the market more secure. In commercial air traffic control, Thales’s portfolio ranges 2 its service as an operator of resilient, secure mobile networks, EIJI, and from conventional navigational aids to radar and air traffic control has already secured SNCF as one of its first customers. centres, surveillance systems, satellite navigation and airport management solutions. In France, the Ministry of Defence granted Thales a 10-year service contract for the implementation of optimised logistics for the resupply of Thales plays a key role as an architect and integrator in the future air aeronautical consumables (LORCA programme). Following the contract traffic management system, particularly through the OACI’s (1) “Global won by the business combination comprising Thales and RUAG Air Navigation Plan – Aviation System Block Upgrades” initiative. Defence France for the implementation of the CERBERE (Training centres Thales is the main industrial partner of the SESAR (2) project in Europe representative of battlefields and reproducing engagements), the Group and a key player in the NextGen programme in the United States. is also involved in the establishment of high-speed LTE 4G Across all continents, Thales offers one of the broadest lines of communications infrastructure for training ground forces. commercial and military ground- based and naval radars, on the In exports, Thales was chosen by a country of the Middle East to supply market, for surveillance, air traffic management and fire control. 1,300 a tactical communications network, in partnership with the company Thales radars are in service across the world and the Group equips Ultra. For another customer in the Middle East, Thales provided the first over 70 countries with commercial radars and more than 45 countries complete satellite-based ground military telecommunication system with military radars. composed of mobile stations and anchorage integrating SYSTEM 21. In the military segment, Thales is specialised in air operations command Finally, Thales finalised the deployment of the professional mobile radio and control systems and air defence radar systems, ensuring the infrastructure (TETRA network) for the Mexico City metro. protection and security of forces and resources deployed in over 45 countries. As a mission systems integrator, Thales is proud to contribute Thales’s protection systems address both the defence and security actively to major military programmes in the world such as ACCS for markets. In defence, Thales was notified of the second round of the NATO, SCCOA for France and FLORAKO for Switzerland. Thales EMBR (multi-role armoured vehicle) programme of the French land excels in the fields of system integration, complex programme management, forces, a key component of the SCORPION programme. For this real time and non- real time software, human- machine interfaces and programme, Thales was also selected alongside Nexter and Safran by service oriented architecture. the French Defence Procurement Agency for the architect-integrator contract. In exports, for Qatar, the C4I system for the Léopard 8x8 Thales owns 50% of Thales Raytheon Systems AMDC2, a company combat vehicle was formally accepted and the first vehicles were that specializes in Integrated Air and Ballistic Missile Defence (IAMD) commissioned. Command and Control (C2) Systems. Thales Raytheon Systems AMDC2 provides NATO and the NATO Nations with Integrated Air In security, Thales was selected as one of three protection providers for and Missile Defence (IAMD) capability as part of the Air Command all the French military sites and for the protection of the United Nations and Control System (ACCS). camps in Gao and Kidal (Mali). In addition, John F. Kennedy airport in New York selected Thales’s offer for the definition of protection systems Thales also offers a wide range of weapon systems for medium-range for terminal 4, its busiest terminal. In the Middle East, various (SAMP /T), short- range (Crotale and RAPIDDefender) and very short- inaugurations reflected the progress of Thales’s two major contracts in range markets (RAPIDFire cannon and RAPIDRanger missile system). the region: security of the Port of Doha and the Dubai Smart City. In The Group also supplies the lightweight multi- role missile (LMM) family. France, Thales will also provide security systems under the “PassDef” In the field of optronics, the combination of optical and electronic systems, framework agreement for protection of the national military sites. Thales designs and manufactures components and systems for day and The Identification activity was sold to the Imprimerie Nationale (French night surveillance, reconnaissance, protection, threat detection and target printing agency) to form a French champion in secure ID documents. acquisition on all types of land, sea (surface and subsurface) or air

(1) International Civil Aviation Organization. (2) Single European Sky ATM Research.

2017 Registration Document — THALES 127 Business review — Operating segments

platforms for defence and security customers worldwide. Thales’s expertise • the new TRAC NG in-flight monitoring radar with exceptional dual in optics is also applicable to the commercial segment of high end zoom capacities (commercial and military). Derived from the STAR NG lenses for cinema and for ultra- high power scientific and industrial lasers. radar, the most advanced approach radar in the world, the TRAC NG radar responds to requirements to increase the primary in-flight Thales designs, manufactures and supports armoured military vehicles surveillance capacity of increasingly saturated air spaces and including the Hawkei and the Bushmaster. Thales provides integrated ensure heightened surveillance in secure military air space; capability solutions at all levels of the value chain, from subsystem supplier to system integrator; mission systems design authority and prime • in November 2017, Thales acquired Aveillant, a UK company contractor. The open architecture systems of vehicles provides highly specialised in the drone detection holographic radar technology. standardised “plug and play” capability for on-board sub-systems and In terms of commercial success, Thales, alongside the Naval Group, products, increasing vehicle capability and performance whilst reducing was notified by the Ministry of Defence of the contract for the size, weight and operator workload and whole life system costs. development and production of five medium-sized frigates (FTI in French) for the French Navy, as part of a programme piloted by the 2.1.3.3.2 Competitive position French Defense Procurement Agency (DGA). The first of the five frigates will be delivered in 2023 for entry into active service in 2025. Thales’s expertise in all aspects of air traffic control (automation, Thales-developed systems at the cutting edge of technology will equip navigation and surveillance) is widely recognised by the world’s civil the new frigate BELH@RRA, such as the fully digital multifunction radar aviation authorities. With over 40% of the world’s airspace controlled SEA FIRE, equipped with four fixed panel antenna which meet the by TopSky ATC, Thales is at the forefront of air traffic control systems requirements of different missions, including self-defence of the vessel and civilian radars. and extended air defence and can take control of ASTER missiles. The Sea Fire is designed to perform in the complex conditions of the Other major players in the commercial sector are the US companies littoral or in heavily jammed environments to counter conventional, Lockheed Martin and Raytheon, European companies Indra and asymmetric or emerging air and surface threats. Leonardo (Selex), and in some niche areas, Saab, Frequentis and Harris. In terms of convincing past performance, during a ballistic missile exercise In the military sector, Thales’s main competitors for surface radars are in the Atlantic Ocean, Thales’s SMART- L radar on board the HNLMS the US companies Lockheed Martin, Northrop Grumman, and Raytheon, De Ruyter successfully detected and followed a ballistic missile launched and Leonardo, Airbus Group, BAE Systems, Indra and Saab in Europe. at an altitude of 300 km and a speed of more than 3 km/ second. Thales is one of Europe’s leading suppliers of medium-range, The system made the data accessible in real time to an Aegis class US short-range and very short-range missiles and weapon systems. Other Navy vessel which used this data to launch an SM-3 missile. principal players in this field in Europe (MBDA) and the United States This technology is used by the SMART- L Multi Mission radar currently (Raytheon and Lockheed Martin) are also major customers of Thales’s under development by Thales for the four defence and air command missile electronics and key partners in weapon systems. frigates of the Netherlands Royal Navy and for two land versions for the Netherlands Royal Air Force. In parallel with the American exercise, Thales is Europe’s leading defence optronics supplier facing competition the SMART- L Multi Mission radar installed on the test tower on Thales’s site in this segment from US suppliers (Raytheon, Lockheed Martin and Flir in Hengelo (Netherlands) also detected and tracked the ballistic missile. Systems) and from Israeli suppliers (primarily Elbit). The protected vehicles systems market segment is dominated, on an international level, A preliminary air defence agreement was signed between Eurosam, by BAE Systems, General Dynamics, Rheinmetall, Krauss-Maffei a European consortium between Thales and MBDA, and the Turkish Wegmann and Nexter. Thales operates in Europe as an independent manufacturers Aselsan and Roketsan in July 2017. This agreement integrator both for its own and other suppliers’ equipment within complex formalises the willingness of Thales, MBDA, Aselsan and Roketsan to work mission systems. together to respond to demands from the Turkish authorities to define the architecture for the future air defence and anti- ballistic missile system to enable them to fulfil their mission to protect their population and territory. 2.1.3.3.3 Significant events in 2017 The integrated air defence solution ForceSHIELD was commissioned in In 2017, the Air Traffic Management (ATM) business line secured a Indonesia. In addition to the STARStreak air defence missiles, this solution variety of contracts across its full portfolio of technologies. A turnkey includes the CONTROLMaster 200 surveillance and coordination contract was secured for Tanzania, for the modernisation of air control system, RAPIDRanger mobile integrated weapon systems and Lightweight infrastructures in response to the increase in traffic in the country and in Multiple Launchers (LML), as well as communication, training and support East Africa. This contract includes TopSky ATC, primary and secondary equipment. radar system – Star NG RSM970S, 4 civil radars, civil engineering 2017 was a year of successful qualification firing tests for the Lightweight and training of controllers and engineers. Multi-role Missile (LMM) The LMM is on track for official qualification Thales was selected by Norway for the deployment of 14 ground- in 2018, following numerous successful firings. based navigational aid systems (TACAN), as part of a campaign to In May 2017, Thales conducted a demonstration in real-life conditions modernise the existing equipment and to renew the ILS navigation of all of its operational capacities in the surveillance, identification systems in Germany and the Netherlands. and neutralisation of drones. This trial was carried out in cooperation In the area of surface radars, Thales launched some new products in 2017: with companies from the Cluster Paris Drone and Cœur Essonne, on the Brétigny- sur- Orge site near Paris. • the Ground Fire family: a range of new generation multifunction ground radars. These fully digital radars will simultaneously provide Finally, ThalesRaytheonSystems and Lockheed Martin signed a memorandum for surveillance and air defence missions; of understanding to develop anti-ballistic missile territorial capacities for NATO’s Air Command and Control System (ACCS).

128 THALES — 2017 Registration Document Operating segments — Business review

2017 was a major year for the Hawkei protected tactical vehicle with 2.1.3.4.3 Significant events in 2017 the launch of the initial production phase of 1,100 armoured vehicles for the Australian army. This step follows a long programme of tests Electronic combat systems conducted to ensure the customer’s demands are fully met. This new To meet orders for Rafale intended for France and export to Egypt, Qatar vehicle is now ready for export and is presented regularly at the and India, the rate of production increased to two pieces of Radar and different Defence trade fairs across the world, such as the recent IDEX Electronic Warfare equipment per month starting in March. In addition, and MSPO. Thales and the Indian company Reliance Defence Ltd announced their In optronics, a contract for airborne reconnaissance pods was signed intention to create a JV to produce a local part of the Thales contract for in the Middle East. The land optronics activity enjoyed exports of 36 Rafales in India and to perform part of its offset obligations. armoured platforms from several partners, particularly in South-East Asia Airborne surveillance and intelligence systems and the Middle East. In January, Thales and Lockheed Martin announced the awarding of a contract for the supply of a new air surveillance and control system for 2.1.3.4 Defence mission systems the Royal Navy as part of the Crowsnest programme. In March, SIMMAD (Integrated System to Maintain Aeronautical Materials in operational condition of the French Ministry of Defence) entrusted 2.1.3.4.1 General overview Thales, for a period of 113 months, with management of all the aeronautical material consumables used in Defence. April saw Thales manufactures electronic combat, intelligence, surveillance and the delivery of the eighth and final Ocean Master radar for Beech reconnaissance systems, as well as naval surface and underwater 350 King Air aircraft used by the French Customs. These planes are combat systems. designed for maritime surveillance missions on the Atlantic coast, For airborne combat missions, Thales produces, in cooperation with Mediterranean and overseas. In June, the Chinese government ordered Dassault Aviation, radar systems and equipment for the Rafale and the a DORIS (Satellite-based Integrated Orbit Determination and Radio Mirage 2000 fighter aircraft and for future combat unmanned aerial Positioning equipment) to equip an ocean observation satellite. In July, vehicles (UAVs), as well as electronic warfare radar systems, designed France’s Ministry of the Armed Forces announced the order for the to detect threats and protect platforms. development and production of equipment for the electronic warfare suite as part of the launch of the Mid- Size Frigates (FTI) programme. For intelligence, surveillance and reconnaissance missions, Thales 2 designs naval, ground and air patrol and surveillance solutions, Surface naval systems including a range of electromagnetic-based information-gathering In April, a US customer placed the first order for a Tacticos combat sensors. These systems – which are installed on aircraft or naval management system to equip the first platform of a new family of platforms – incorporate surveillance radars, acoustic sub- systems and vessels. In July, Bangladesh entrusted Thales with the mid-life restoration measurement and data linking equipment. Thales also designs complete of the combat system installed on a first heavy corvette. In August, the UAV systems with intelligence, surveillance, reconnaissance and target Canadian government announced a support contract for the acquisition capabilities. re-equipment, distribution, maintenance and associated training for In surface naval warfare, Thales offers comprehensive combat systems coastal and Arctic patrol vessels. This contract includes an initial service that integrate on-board sensors (radar, sonar, electronic warfare, period of eight years as part of a maximum term of 35 years. It is the infrared sensors, etc.), weapon systems and communications and largest ever signed in the history of the Canadian Royal Navy. command equipment. Thales also has naval platform engineering and Underwater warfare systems support capabilities. In January, the Navy of the United Arab Emirates ordered two variable In underwater warfare, Thales offers a broad range of products depth Captas sonars to equip two of its anti- submarine warfare including submarine sonar suites, hull- mounted and towed array sonar capacities surface buildings. In March, a contract was signed with the for surface ships, anti-mine systems, including the use of unmanned Australian Royal Navy for the supply of an anti-sea mine system (SEA underwater vehicles, as well as acoustic sensors for submarine guidance. 1778 programme) including five surface naval drones and seven underwater naval drones. In May, as part of the restoration project of 2.1.3.4.2 Competitive position three La Fayette frigates (FLF in French), Naval Group announced a contract for three Kingklip hull- mounted sonars. In July, Naval Group In electronic combat systems, Thales is one of the leading European also announced an order for the production of the sonar suite to equip players, competing with BAE Systems, Leonardo, and the US companies future mid- size frigates (FTI). As part of the optimisation project for the Raytheon, Lockheed Martin and Northrop Grumman. In intelligence, support of sensors embedded on surface and underwater platforms of surveillance and reconnaissance systems, its main competitors are Airbus, the British Royal Navy (SSOP, Sensors Support Optimisation Project), a Elbit and General Atomics. contract for the support in service of several suites of sonars was awarded at the end of December. In surface naval systems, Thales is one of the principal European players, alongside Leonardo, BAE and Saab, and competes with Lockheed Martin in the United States. In underwater warfare, Thales is one of Europe’s main players along with Atlas Elektronik and Ultra Electronics, and is in competition with Lockheed Martin, Raytheon and L3 in the United States.

2017 Registration Document — THALES 129 Business review — Research and innovation

2.2 RESEARCH AND INNOVATION

Thales needs to be able to offer increasingly sophisticated technologies, Thales bases its vision of innovation on openness and partnership particularly in the detection, analysis and decision- making fields, across multiple dimensions: in order to design and develop critical information systems. These a technological dimension, by collaborating with academic innovative solutions serve customers in the aeronautics, space, ground • laboratories; transportation, defence and security markets. • an entrepreneurial dimension by forging closer ties with SMEs and start- ups; • a “market” dimension, by jointly innovating with customers and their ecosystems to create new usages.

2.2.1 Research and development, the key to competitiveness and growth

Some 25,000 Thales employees, over 70% of them engineers, are A significant portion of this budget is devoted to upstream research in involved in the Group’s technical operations, ranging from research to order to develop: engineering. In 2017, Thales spent €797 million (5% of sales) purely new technologies; on self- funded R&D, an essential lever to remain competitive. • • new system and product concepts; • new engineering tools and methods for critical information systems.

2.2.2 Four key technical domains

Governance of research and development for key technologies is split into four domains: FOCUS 1 hardware technologies: electronics, electromagnetism, optronics, • A world first in 2017, the artificial nano-neuron acoustics, radiofrequency techniques and management of thermal from the Thales/ CNRS joint physics laboratory constraints; In 2017, a team from the CNRS/ Thales joint physics unit, in software technology: processing computers, real- time on-board • collaboration with American and Japanese researchers unveiled, systems, distributed systems, service- oriented architectures, model-driven in the prestigious science journal Nature, the first artificial engineering, and cybersecurity; nano-neuron with the ability to recognise numbers spoken by • information and cognitive sciences: Artificial Intelligence, big data different individuals. This electronic nano-neuron is a breakthrough processing, autonomous systems, synthetic environments, and human in artificial intelligence and its applications. factors; To achieve this result, an exceptionally stable magnetic oscillator • systems: focused on systems design architecture, this area provides was used. Each gyration of this nano- compass generates an support for methodology, processes and expertise. electrical output, which imitates the electrical impulses produced by biological neurons. Interconnected by artificial synapses, these nano-neurons will process and classify, almost instantaneously, the masses of data that will be produced in future years by the billions of connected objects which are gradually invading all sectors of economic life.

130 THALES — 2017 Registration Document Research and innovation — Business review

2.2.3 Thales at the heart of innovation ecosystems

Wherever it is located, Thales seeks to build partnerships within innovation ecosystems, with academic partners, design centres, innovative businesses FOCUS 2 and industrial groups for joint innovation on applications, business models and technologies. The smart sensor: from physics to artificial intelligence To develop the technologies it needs, the Group relies heavily on Sensor technologies form part of the Group’s DNA. Combining cooperation between its research teams and the academic world. physics, electronics, signal processing and imaging, in the future Thales Research & Technology (TRT), an international network of corporate these devices will be embedded with an increasing amount of laboratories, is responsible for building relationships with academic partners. intelligence as close as possible to raw data. TRT has facilities in France, the United Kingdom, the Netherlands, Thales has developed an artificial intelligence solution capable of Singapore and Canada. In France, the Palaiseau laboratory, located detecting elements of interest in real time in optronic images taken on the École Polytechnique campus, is involved in the world-class during air missions. Built into the sensor, this Artificial Intelligence will science and technology complex in Saclay, offer assistance to pilots during a mission. This technology will achieve the “short loop”, so long awaited by operational experts from While the Singapore centre has partnered with Nanyang Technological detection through to engagement in a considerably reduced time. University and with France’s national research institute CNRS, in one of the few joint international research units with an industrial partner. Also in radars, artificial intelligence will come into play immediately after signal digitisation. A new concept of antenna already implements In France, Thales has numerous strategic partnerships, for example, with this paradigm, by combining direct digitisation of the signal and the CNRS, the CEA, École Polytechnique, Telecom Paris Tech, and intelligence, for the detection, location and identification of hostile Université Pierre et Marie Curie (UPMC- Paris VI). signals. This heavy involvement of the Group in research in close partnership with the public research sector was recently highlighted by the journal Nature, which publishes the list of the “Top 100 Corporate research In 2017, Thales created CortAIX, an artificial intelligence laboratory institutions: the leading corporate institutions for high-quality science”. with around fifty people, to develop the use of AI in Thales’s systems. 2 In this list, Thales ranks second in France and 27th in the world, streaks The laboratory is situated in Montreal, in the heart of one of the world’s ahead of all the other companies in its sector. leading artificial intelligence ecosystems. Thales researchers from CortAIX are forming collaborations with MILA (the Quebec Institute of The most advanced form of partnership is the joint laboratory, such as Artificial Intelligence), IVADO (Data Optimisation Institute), the Quebec those operated by Thales with the CNRS for physics, with CEA-LETI as Artificial Intelligence Institute and the Vector Institute in Toronto. part of the III-V Lab (an EIG whose members are NOKIA, Thales and CEA-LETI), with CEA-LIST for artificial vision and formal approaches to In emerging countries, the Group is developing its R&D activities by the development of critical software, and with UPMC in artificial establishing innovation platforms locally, using the tried and tested intelligence, etc. principles of joint innovation with local players and, in so doing, building long- term, trust- based relationships. Thales is a major player in various international competitiveness centres and a founding member of the Institut de Recherche Technologique In 2017, Thales continued to step up its work with start- ups. Saint- Exupéry technological research institute. Already a founding member of Starburst, a specialised incubator in the In the United Kingdom, TRT has direct links with several major Universities aeronautics and space field, Thales was selected by the world’s largest through its R&T centre, including Bristol. Thales is an active member of incubator Station F to run its cybersecurity programme. Thales selected many collaborative partnerships in the United Kingdom: the Centre for nine start- ups adding value to the Group’s cyber security offer. Thales Secure Information Technologies (CSIT), based at Queen’s University and the start-ups selected will offer their customers solutions covering the Belfast; the Centre for Smart Infrastructure and Construction (CSIC) and entire cybersecurity chain (see Focus 3). the Institute for Manufacturing (IfM), based at Cambridge University; the Training also forms part of the overall strategy of linking the Group with UK Defence Growth Partnership (DGP); the mobile Virtual Centre of the academic world. The Group supports around 200 doctoral students Excellence (mVCE), with numerous Universities; the Defence Academic worldwide. They work on subjects directly connected with the technical Pathways (DAP) and the UK Catapults, particularly the Digital Catapult issues facing Thales, which therefore reinforces its appeal to young where Thales has contributed to the emergent IoT defining the security scientists. Thales also supports six teaching chairs in subjects that are in implications of pervasive digital Sensors and their associated data. line with its technical priorities. In Canada, the Group regularly works with research networks and institutions such as CRIAQ (Consortium de Recherche et Innovation en Aérospatiale au Québec), the University of Toronto, McGill University, the École Polytechnique de Montréal and Laval University, with which Thales FOCUS 3 has entered into an agreement for a joint research unit in urban sciences. At the heart of the cybersecurity ecosystem Harnessing innovation where it is most dynamic, is one aspect of Thales’s innovation strategy. By becoming a leading partner of Station F for cybersecurity in 2017, Thales tests the solutions proposed by the start- ups who join the programme. One such start-up, KeeeX, a French start-up founded in 2014, has developed a unique universal embedded digital signature technique which relies on distributed blockchain architecture. This innovation guarantees the integrity and authenticity of the data /documents exchanged, which is a major breakthrough in the digital transformation.

2017 Registration Document — THALES 131 Business review — Research and innovation

2.2.4 A dynamic approach to intellectual property management

Thales supports its R&D activities with a dynamic approach to intellectual property management. FOCUS 4 The Group filed more than 300 new patent applications in 2017. The The digital factory: the driving force behind the Group’s continued large number of patent applications in recent years reflects digitisation Thales’s commitment to innovation and its ability to translate research results into competitive advantages. Created in 2017, the Digital Factory will unite 150 world-class experts in digital technologies, recruited internally and externally, The Thales portfolio, which includes more than 15,000 patents and to serve Thales’s customers in all its businesses, through the patent applications, is regularly adapted to operational requirements, extensive introduction of mass data processing and intelligence particularly to protect Thales’s market share. technologies to the Group’s solutions, while also providing data In 2017, Thales was once again included in the Top 100 Global security – a fundamental requirement of the digital economy. Innovators ranking compiled by Clarivate Analytics, with the Group It will host a digital platform (“Digital Platform Foundry”) which will standing out for the volume, success and influence of its patents. This maximise economies of scale and synergies, based on which new achievement underlines Thales’s commitment to innovating, protecting its “As a Service” offers will be developed for customers of the Group. ideas and bringing its inventions to market. Thales has been included in this prestigious ranking five times since 2011, which testifies to the importance It will also host an incubator for internal and external start-ups and the Group places on implementing an active and ambitious intellectual a digital academy designed to disseminate the digital culture property management strategy. within the Group.

132 THALES — 2017 Registration Document Relations between Thales and its subsidiaries — Business review

2.3 RELATIONS BETWEEN THALES AND ITS SUBSIDIARIES

2.3.1 Simplified organisational chart at 31 December 2017

This simplified organisational chart includes fully consolidated companies that account for more than 0.5% of consolidated sales, in the main countries in which the Group operates. The companies consolidated under the equity method are not included in this chart (with the exception of NAVAL GROUP).

THALES

France Germany Netherlands United Kingdom Canada United States Australia

100% 100% 99% 100% 100% 100% 100% Thales Thales Thales Thales Thales Thales Thales Systèmes Deutschland Nederland BV UK Ltd. Canada Inc. Avionic Inc. Australia Ltd. Aéroportés SAS GmbH

Thales Thales Thales 100% 100% 100% Defense & Air Systems Avionics Ltd. SAS Security Inc. 2

Thales Thales Thales 67% Alenia Space 100% Training & 100% Components SAS Simulation Ltd. Corporation

Thales Thales 100% Communications 100% Naval Ltd. & Security SAS

Thales Thales 100% Services 100% Underwater SAS Systems Ltd.

Thales 100% Avionics 100% Thales Electrical Optronics Ltd. Systems SAS

6.96% Thales Thales 93.04% Trixell SAS 100% Transport & Avionics SAS 51% Security Ltd.

100% 35% NAVAL Thales Ground GROUP Transportation Systems UK Ltd.

2017 Registration Document — THALES 133 Business review — Relations between Thales and its subsidiaries

2.3.2 Role of Thales (parent company) within the Group

Thales (parent company) acts as a holding company for the Group: • it provides subsidiaries with specialist assistance, including legal, tax and financial expertise, for which the subsidiaries pay a fee; • it holds shares in the Group’s major subsidiaries; • it provides financing, cash pooling and, where necessary, guarantees. • it manages central functions such as Group strategy, trading policy, legal and financial policy, operational monitoring, human resources In addition to these functions, Thales (parent company) conducts its own policy and communications; research, described beginning on pages 130 et seq. A list of the main consolidated companies can be found below.

2.3.3 Financial flows between Thales (parent company) and its subsidiaries

Thales (parent company) receives dividends from its subsidiaries, as As a rule, the cash surpluses of subsidiaries are transferred to the parent approved by their respective Annual General Meetings, and in company under a centralisation system known as cash pooling. In return, accordance with the applicable legislation and regulations in their Thales (parent company) meets the cash flow requirements of the countries of operation. subsidiaries. The parent company conducts operations in financial markets to arrange the necessary investments and loans, in the context of cash In addition to these dividends and the payment of fees for shared pooling, to meet its own requirements and those of its subsidiaries. services, the main financial flows between Thales (parent company) Except in special cases, this system applies to all subsidiaries in which and its subsidiaries relate to cash pooling. Thales has majority control.

134 THALES — 2017 Registration Document Information about major operational subsidiaries and manufacturing sites — Business review

2.4 INFORMATION ABOUT MAJOR OPERATIONAL SUBSIDIARIES AND MANUFACTURING SITES

2.4.1 List of main consolidated companies

As part of the simplification of legal structures in France, several mergers came into effect on 31 December 2017: • Thales Air Systems SAS (which became Thales LAS France SAS on 1 January 2018), absorbed the companies TDA Armements SAS, Thales Optronique SAS, Thales Angénieux SAS, Thales Air Operations SAS and Thales Cryogénie SAS; • Thales Avionics SAS (which became Thales AVS France SAS on 1 January 2018) absorbed the companies Thales Electron Devices SAS, Thales Training & Simulation SAS and Thales Avionics LCD SAS; • Thales Systèmes Aéroportés SAS (which became Thales DMS France SAS on 1 January 2018), absorbed the companies Thales Underwater Systems SAS and Thales Microelectronics SAS. The materiality criteria used to prepare these tables have also been applied to the list of the main consolidated companies in Note 17 to the consolidated financial statements.

Company name Country % of capital % of voting held by rights Thales held

1. Controlled companies (fully consolidated) Thales Alenia Space SAS France 67% 67% 2 Thales Alenia Space Italia SpA Italy 67% 67% Thales Air Systems SAS France 100% 100% Thales Australia Ltd Australia 100% 100% Thales Austria GmbH Austria 100% 100% Thales Avionics SAS France 100% 100% Thales Avionics Inc United States 100% 100% Thales Avionics Electrical Systems SAS France 100% 100% Thales Canada Inc Canada 100% 100% Thales Communications & Security SAS France 100% 100% Thales Defence & Security Inc United States 100% 100% Thales Deutschland GmbH Germany 100% 100% Thales e- Security, Inc United States 100% 100% Thales Espana Grp SAU Spain 100% 100% Thales Italia SpA Italy 100% 100% Thales Nederland BV Netherlands 99% 99% Thales Norway AS Norway 100% 100% Thales Polska Sp. z.o.o. Poland 100% 100% Thales Ground Transportation Systems UK Ltd United Kingdom 100% 100% Thales Rail Signalling Solutions AG Switzerland 100% 100% Thales Security Solutions & Services Company Saudi Arabia 100% 100% Thales Services SAS France 100% 100% Thales Solutions Asia Pte Ltd Singapore 100% 100% Thales Systèmes Aéroportés SAS France 100% 100% Thales Transport & Security (Hong Kong) Ltd Hong Kong 100% 100% Thales Transport & Security Ltd United Kingdom 100% 100% Trixell SAS France 51% 51% Thales UK Ltd United Kingdom 100% 100%

2017 Registration Document — THALES 135 Business review — Information about major operational subsidiaries and manufacturing sites

Company name Country % of capital % of voting held by rights Thales held

2. Joint ventures (under equity method) Thales- Raytheon Systems Air and Missile Defense Command and Control SAS France 50% 50% Citylink Telecommunications Holding Ltd United Kingdom 33% 33% NAVAL GROUP France 35% 35% Diehl Aerospace GmbH Germany 49% 49% Sofradir SAS France 50% 50%

3. Associated companies (under equity method) Aviation Communications & Surveillance Systems United States 30% 30% Air Tanker Holdings Ltd United Kingdom 13% 13% Elettronica SpA Italy 33% 33% Telespazio SpA Italy 33% 33%

136 THALES — 2017 Registration Document Information about major operational subsidiaries and manufacturing sites — Business review

2.4.2 Major manufacturing sites

At end- 2017, there were 15 sites employing more than 1,000 staff.

At 31 December 2017 Headcount Owned Size (m²)

France Bordeaux (South- west) 2,850 Leased (Le Haillan), 62,000 and Owned (Pessac) Brest (Brittany) 1,421 Leased 56,000 Cannes (Provence) 2,064 Owned- leased 84,000 Cholet (Pays de la Loire) 1,463 Leased 53,000 Gennevilliers (Île- de- France) 3,593 Leased 90,000 Élancourt (Île- de- France) 3,499 Leased 104,000 Massy (Île- de- France) 1,120 Leased 26,000 Rungis (Île- de- France) 1,215 Leased 23,000 Toulouse (South- west) 4,017 Owned- leased 142,000 Vélizy (Île- de- France) 3,554 Leased 125,000

United Kingdom Crawley 1,784 Leased 26,130 2 Netherlands Hengelo 1,195 Property 87,000

Australia Sydney 1,249 Leased 84,327

Germany Stuttgart 1,595 Leased 59,000

United States Irvine 1,016 Leased 30,440

2017 Registration Document — THALES 137 CORPORATE GOVERNANCE 3

138 THALES — 2017 Registration Document 3.1 COMPOSITION OF THE BOARD OF DIRECTORS AT 31 DECEMBER 2017 140

3.1.1 Directors 140 3.1.2 Other persons attending board meetings (without voting rights) 147

3.2 REPORT OF THE BOARD OF DIRECTORS TO THE GENERAL MEETING OF 23 MAY 2018 ON CORPORATE GOVERNANCE 148

3.2.1 Governance 148 3 3.2.2 Compensation of Company representatives 156

3.3 CORPORATE MANAGEMENT AND EXECUTIVE COMMITTEE 168

3.4 COMPENSATION OF OTHER EXECUTIVES 169

3.4.1 Compensation of other Group executives 169 3.4.2 Share- based compensation 169

3.5 INCENTIVES AND PROFIT-SHARING 172

3.5.1 Profit- sharing 172 3.5.2 Incentive scheme 172

3.6 STATUTORY AUDITORS 173

3.6.1 Principal statutory auditors 173 3.6.2 Additional statutory auditors 173 3.6.3 Statutory auditors’ fees 173

2017 Registration Document — THALES 139 Corporate governance — Composition of the Board of Directors at 31 December 2017

3.1 COMPOSITION OF THE BOARD OF DIRECTORS AT 31 DECEMBER 2017

3.1.1 Directors

3.1.1.1 Appointed at the General Meeting (1)

PATRICE CAINE

(47) Patrice Caine was born on 7 January 1970 and is a French citizen. Patrice Caine is a graduate of the École Polytechnique and the École des Mines de Paris and holds the rank of Chief Engineer (Ingénieur en chef ) of Chairman & Chief Executive the Corps des Mines. He began his career in 1992 at Fournier, a pharmaceutical company, before working Officer as a consultant in M&A and Corporate Strategy at Charterhouse Bank Limited in London. Chairman of the From 1995 to 1998, he was special advisor to the Prefect of the Franche- Comté region of France and head Strategic & CSR Committee of the Industrial Development and Energy Division at DRIRE, the French agency responsible for industry, First appointed research and the environment. 23 December 2014 From 1998 to 2000, he was part of the Conseil Général des Mines, in charge of human resources for the Current term expires: Corps des Mines. During this time, he oversaw the training of graduate engineers for the civil service at the AGM 2018 École des Mines de Paris. From 2000 to 2002, he worked as a technical advisor on energy on the staff of the Minister of the Economy, Finance and Industry. Number of shares held In 2002, Patrice Caine joined the Thales group’s Strategy department before being appointed to manage 6,929 Thales shares • the following operating units: Aviation & Naval, Communications, Navigation & Identification, Air Systems, (6,773 in registered form, Radio Communication Products, Network & Infrastructure Systems and Protection Systems. 156 under the Group savings plan); He was awarded the bronze National Defence Medal (Médaille de la Défense Nationale) In 2014, he was • 3,438 subscription options made a Knight of the French National Order of Merit (Chevalier de l’Ordre National du Mérite). for Thales shares. In February 2013, Patrice Caine joined Thales’ Executive Committee as Senior Executive Vice President, Chief Operating Officer and Chief Performance Officer. On 23 December 2014, he was appointed Chairman and CEO of Thales by the Board of Directors. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: Director of Naval Group. Abroad: none. Other positions held by Mr Caine in the last five years In France: Director of École des Mines de Paris. Abroad: none.

(1) Of the directors referred to in this section, Ms Renaud-Basso, director representing the French state, was appointed by order of the Minister of the Economy and Finance pursuant to Article 4 of Order No. 2014- 948.

140 THALES — 2017 Registration Document Composition of the Board of Directors at 31 December 2017 — Corporate governance

LAURENCE BROSETA

(49) Born on 22 September 1968, Laurence Broseta is a French citizen and a graduate of the École Polytechnique and Télécom ParisTech. Director proposed by the Public Sector She began her career at RATP where she oversaw operations at its bus, tram and underground departments. (Article 6 of Order No. 2014-948) She also took part in new rail infrastructure projects in the UK and South Africa, where she started up and managed a locally- based operating company. First appointed 14 May 2014 In 2008, she became head of RATP Dev’s international business unit, with responsibility for operating Transport services (Bus, rail, underground and tram) in nine countries and leading business development. Current term expires AGM 2021 In March 2013, she became Senior Executive Vice President France of Transdev, an international group that provides mobility and passenger transport services. Number of shares held 500 Thales shares Since July 2016, Laurence Broseta has been Chief Executive Officer of Transdev’s International Zone in charge of Southern Europe and Northern Europe, Asia, the Pacific, South America, the Middle East and In addition, her husband, Africa, which reported €1.7 billion in revenue and has some 20,000 employees. Xavier Broseta, holds: Appointments and other positions held in companies in France and abroad • 450 Thales shares; • 52 Thales shares under Appointments held in other companies the Group savings scheme. In France: member of the Supervisory Board of Vallourec and Director of RATP Dev Transdev Asia. Abroad: Director of Transdev group subsidiaries (in Spain, Portugal, South Korea, India, Germany, Chile, Colombia, Australia, New Zealand). Other positions held by Ms Broseta in the last five years In France: Director of Transdev group subsidiaries, Director of Thello, Director and Vice Chairman of the Union des Transports Publics, and Director of the RATP Foundation. Abroad: Director of RATP Dev group subsidiaries.

CHARLES EDELSTENNE

(79) Born on 9 January 1938 and a French citizen, Charles Edelstenne is a qualified chartered accountant. Director recommended He spent his career at Dassault Aviation, where he started in 1960 as Head of the Financial Studies by the Industrial Partner Department. He became Company Secretary in 1975, then Vice President for Economic and Financial Affairs in 1986. Member of the Strategic & CSR Committee From 2000 to 2012, he was the Chairman & Chief Executive Officer of Dassault Aviation. First appointed In January 2013, Charles Edelstenne became Chief Executive Officer of Groupe Industriel Marcel Dassault. 19 May 2009 He was the founder, Managing Director then Chairman & Chief Executive Officer, and is now Chairman of Current term expires the Board of Directors of Dassault Systèmes. AGM 2018 Appointments and other positions held in companies in France and abroad 3 Number of shares held Appointments held in other companies 509 Thales shares In France: Chairman of the Board of Directors of Dassault Systèmes SE (1), Chief Executive Officer and Member of the Supervisory Board of Groupe Industriel Marcel Dassault SAS, Honorary Chairman of Dassault Aviation SA (1), Director of Dassault Aviation SA (1), Dassault Medias SA, Groupe Figaro Benchmark SASU, Carrefour SA (1) and Sogitec Industries SA, Honorary Chairman of Gifas, Manager of the non-trading Companies Arie, Arie 2, Nili and Nili 2, and Director of the mutual fund (“SICAV”) Monceau DUMAS. Abroad: Director of SABCA (1) (Belgium), Director of Dassault Falcon Jet Corp. (United States) and of the bank Lepercq de Neuflize & Co (United States). Other positions held by Mr Edelstenne in other companies in the last five years In France: Chairman and CEO of Dassault Aviation SA (1). Abroad: Chairman of Dassault Falcon Jet Corp. (United States), President de Dassault International Inc. (United States).

(1) Listed company.

2017 Registration Document — THALES 141 Corporate governance — Composition of the Board of Directors at 31 December 2017

YANNICK D’ESCATHA

(69) Born on 18 March 1948 and a French citizen, Yannick d’Escatha is an engineer who graduated from the École Polytechnique and the École des Mines de Paris. Independent director In 1972, he lectured at the École Polytechnique, the École des Mines de Paris and ENSTA, the French Chairman of the Governance engineering and research institute. and Remuneration Committee In 1973, as a technical expert with the French Ministry of Industry, he took part in the drafting and First appointed subsequent implementation of the French technical regulations relating to nuclear- fired water boilers. 19 May 2009 In 1978, he was appointed head of the control office for nuclear construction where he was responsible for Current term expires government technical control of the application of this regulation to the French electro- nuclear programme. AGM 2020 In 1982, he was seconded to Technicatome, a subsidiary of the CEA (French Atomic Energy Commission), Number of shares held whose main activity is industrial general contracting in the field of nuclear propulsion for French naval vessels. 500 Thales shares Having been director of the Cadarache and Aix-en- Provence sites, Yannick d’Escatha was appointed Deputy Chief Executive Officer of Technicatome on 1 January 1987. On 1 March 1990, he was asked by the Executive Director of the CEA to accept the post of director of the newly created Advanced Technologies division, and became Deputy Executive Director of the CEA on 14 September 1992. He was appointed Managing Director of the CEA on 1 July 1995 and Chairman of the holding company CEA- Industrie on 28 June 1999. On 1 January 2000, he was appointed Executive Vice President Industry at EDF. As the head of EDF’s Industry Cluster, he was responsible for the company’s production and engineering activities and industrial policy. In January 2002, he became Chief Operating Officer at EDF. In February 2003, the French Council of Ministers appointed Yannick d’Escatha as Chairman of the National Space Research Centre (CNES) and renewed his appointment in February 2010, until he reached the age limit of 65 in 2013. Since May 2013, he has worked as a consultant: Advisor to the Chairman of Sofinel (Société Française d’Ingénierie Électronucléaire et d’assistance pour l’exportation) and, since January 2017, to the Chairman of EDF. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: Member of the Académie des technologies (the National Academy of Technologies of France). Abroad: none. Other positions held by Mr d’Escatha in the last five years In France: Chairman of the National Space Research Centre (CNES), Chairman of the Board of Directors of the University of Technology of Troyes, member of the Board of Directors of EDF (1), Permanent Representative of the CNES on the Board of Directors of Arianespace SA and Permanent Representative of the CNES on the Board of Directors of Arianespace Participation. Abroad: none.

PHILIPPE LÉPINAY Born on 3 December 1953, Philippe Lépinay is a French citizen and a graduate engineer of the Institut de (64) Marketing International, Université Paris VII. Director representing Between 1977 and 1986, he held a variety of sales and marketing roles with the Appalette & Tourtellier employee shareholders Systèmes, Radiall and Sopema groups. Member of the In 1986, he joined Thales Electron Devices as an export sales engineer, and in 2000 he became head of Strategic & CSR Committee development at Thales Engineering & Consulting. First appointed He joined Thales International in 2003. Since 2010, he has been Vice President, International Relations at Thales. 8 March 2007, effective 1 April 2007 Appointments and other positions held in companies in France and abroad Current term expires Appointments held in other companies AGM 2021 In France: International Relations Delegate of the French Federation of Employee Shareholders’ Associations (FAS), Vice Chairman of the Federation of Employee Shareholders’ Associations of Thales (FAST), member of Number of shares held: the Supervisory Committee of the Thales Employee Shareholding FCPE ( investment fund) and member of the • 1,105 Thales shares; Development Council of the ENSOA (French School for Active Non- Commissioned Officers). • 2,313 Thales shares under Abroad: none. the Group savings scheme. Other positions held by Mr Lépinay in the last five years Chairman of the FAS, member of the Steering Committee for Profit- sharing, Incentives, Savings and Employee Shareholding (COPIESAS). In France: none.

(1) Listed company.

142 THALES — 2017 Registration Document Composition of the Board of Directors at 31 December 2017 — Corporate governance

ARMELLE DE MADRE

(47) Born on 2 May 1970, Armelle de Madre, a French and Dutch citizen, graduated from the University of Colombia, New York and HEC, Paris. Independent director Armelle de Madre started her career in 1993 as a Marketing Analyst at Renault. In 2001, she became First appointed Training Manager for the Head Office, then HR Manager for Renault’s logistics business. In 2006, she was 28 June 2017 appointed Human Resources Director firstly in charge of the Flins factory, then for Renault’s vehicle and Current term expires mechanical engineers, a remit which included the group’s Technocentre, one of the largest R&D centres in AGM 2019 France with more than 16,000 employees. Number of shares held She joined Schneider Electric in 2010 as Strategy and Social Innovation Director, and then the Arkadin 500 Thales shares Group in 2011, which provides Unified Communications solutions and is a subsidiary of NTT, one of the main telecoms operators in the world, as Vice Chairman of Human Resources in charge of Europe, the Middle East and Africa (EMEA). In 2016, she became Vice Chairman of Marketing, EMEA. Since April 2017, Armelle de Madre has been Human Resources Director of Arkadin and, in this capacity, joined the Group’s Executive Committee. She is also a member of the International Women’s Forum France. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: none. Abroad: none. Other positions held by Ms de Madre in other companies in the last five years In France: none. Abroad: none.

ODILE RENAUD-BASSO

(52) Born on 2 June 1965, Odile Renaud-Basso, a French citizen, is a graduate of the Institut d’Études Politiques de Paris and a former student of the ENA (1990, Jean Monnet year). Director proposed by the Public Sector, appointed After starting her career as an auditor in the Cour des Comptes (1990-1994), Odile Renaud-Basso joined representative of the French the French Treasury Department where she held various positions between 1994 and 2005 related to state by order of 19 July 2017 international, industrial and financial issues. In 2005, she was appointed Director of the Directorate-General (Article 4 of Order for Economic and Financial Affairs (DG Ecfin) of the European Commission and continued her career in the No. 2014- 948) European bodies, becoming Deputy Head of Cabinet of the President of the European Council in 2010. Member of the In May 2012, she became Deputy Director of the Office of the French Prime Minister. Then in 2013, she Strategic & CSR Committee took up the position of Deputy Chief Executive Officer Caisse des Dépôts and Director of Savings Funds. Member of the Governance Since 30 June 2016, Odile Renaud- Basso has been Director General of the French Treasury. and Remuneration Committee Appointments and other positions held in companies in France and abroad 3 First appointed Appointments held in other companies 19 July 2017 In France: none. Current term expires Abroad: none. AGM 2021 Other positions held by Ms Renaud-Basso in the last five years Number of shares held In France and abroad: 2013- 2016: Director of CNP Assurances and of the La Poste Group. not obliged to hold Thales shares (Art. 5 of Order No. 2014- 948).

2017 Registration Document — THALES 143 Corporate governance — Composition of the Board of Directors at 31 December 2017

LOÏK SEGALEN

(57) Born on 27 March 1960, Loïk Segalen is a French citizen and a graduate of the École Centrale de Lyon and ESSEC. Director recommended by the Industrial Partner He started his career in 1986 in the Finance Department of Dassault International. Member of the Audit He served as financial advisor to Dassault Aviation’s Vice President for Economic and Financial Affairs in and Accounts Committee 1990 and subsequently became Deputy Director (1998- 1999), and ultimately Director. First appointed In January 2009, Loïk Segalen was appointed Vice President for Economic and Financial Affairs at Dassault Aviation. 19 May 2009 He became Vice President for Economic and Social Affairs at Dassault Aviation in September 2011. Current term expires In January 2013, he became Chief Operating Officer of Dassault Aviation. AGM 2018 He is a member of the Dassault Aviation Management Committee. Number of shares held 509 Thales shares He is a Knight of the French Legion of Honour and a Knight of the French National Order of Merit. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: Director of Sogitec Industries, member of the Board of Directors of Gifas. Abroad: Director of Dassault Falcon Jet Corporation (USA), Dassault International Inc. (USA), Midway Aircraft Instrument Corporation (USA), Sabca (1) (Belgium), Sabca Limburg (Belgium) and Dassault Belgique Aviation (Belgium). Other positions held by Mr Segalen in the last five years In France: none. Abroad: Director of Dassault Procurement Services (USA).

ANNE- CLAIRE TAITTINGER

(68) Born on 3 November 1949, Anne- Claire Taittinger, a French citizen, is a graduate of the Institut d’Études Politiques de Paris, and holds a Master’s degree in Urban Sociology, a post-graduate diploma (DESS) in Independent director Urbanism and a degree from the Centre de perfectionnement aux affaires (CPA business school). She began Chairman of the Audit her career in 1976 in the Caisse des Dépôts et Consignations group as manager for urban operations in the and Accounts Committee Société centrale d’équipement du territoire. First appointed She joined the Groupe du Louvre in 1979 as Company Secretary, then became Chairman & Chief 15 May 2012 Executive Officer of the Compagnie Financière Deville. She was subsequently Chairman & Chief Executive Officer of the Compagnie Financière Leblanc, Elm- Leblanc, Vice Chairman & Chief Executive Officer of the Current term expires industrial division of Deville, and Chairman & Chief Executive Officer of Annick Goutal perfumes France AGM 2018 USA and later Baccarat. Number of shares held She became Chief Executive Officer, followed by Chairman of the Management Board of the Société du 612 Thales shares Louvre in 1997, and, in 2002, Chairman of the Management Board of Groupe Taittinger and Chief Executive Officer of its subsidiary Groupe du Louvre when the positions of Chairman of the Board and Chief Executive Officer were separated. She stepped down from these positions in July 2006, after overseeing the sale of Groupe Taittinger to an investment fund in 2005. In September 2006, she formed part of a pool of investors that bought Champagne Taittinger. In 2004, Anne- Claire Taittinger became involved in the Women’s Forum for the Economy and Society, both as a co- founder and investor. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: Chairman of SAS Le Riffray, Director and Member of the Appointments and Compensation Committees of Carrefour (1). Abroad: none. Other positions held by Ms Taittinger in the last five years In France: Until 2015: Director and Chairman of the Appointments, Compensation and Corporate Governance Committee of Club Méditerranée (1). Until 2013: Director of FinanCités, of the IFA (Institut Français des Administrateurs) and of the Fondation Planet Finance, member of the Supervisory Board of Planet Finance. Abroad: none.

(1) Listed companies.

144 THALES — 2017 Registration Document Composition of the Board of Directors at 31 December 2017 — Corporate governance

ANN TAYLOR

(70) Born on 2 July 1947, Ann Taylor is a UK citizen and studied at the University of Bradford, where she obtained a Bachelor’s degree in Political Science and History, and the University of Sheffield, where she Independent director obtained a Master’s degree in Economic History. First appointed In 1974, she was elected MP (Labour) for Bolton West, holding this seat until 1983. 15 May 2012 She subsequently became head of the Housing Corporation and a lecturer at the Hansard Society (a Current term expires member of Birkbeck College) from 1983 to 1987. AGM 2018 In 1987, Ann Taylor was elected MP (Labour) for Dewsbury. She then held various ministerial roles, notably Number of shares held from 1990 to 1997 as Under Secretary of State for Education and Under Secretary of State for the 500 Thales shares Environment. In 1998, she reported directly to the Prime Minister and sat on most government committees. In May 1997, she became member of the Privy Council when she was appointed as Chairman. In 2001, she chaired the Intelligence and Security Committee under the direct authority of the Prime Minister. In 2005, she entered the House of Lords (with a life peerage) where she is a representative at the Parliamentary Assembly of the Council of Europe (Political Committee) and the Assembly of the Western European Union (Defence Committee). She is a member of the NATO Parliamentary Assembly. In 2007, as a British State Minister in the House of Lords, Ann Taylor became responsible for matters of defence, notably as Minister for Defence Equipment and Support in 2007 and 2009, and then as Minister for International Defence and Security from 2008 to 2010. Ann Taylor is currently a member of the House of Lords and chairs its Constitution Committee. She is also a Trustee of the National Coal Mining Museum for England. Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: none. Abroad: member of the Advisory Board of Thales UK PLC (1) and Chair of Council and Pro-Chancellor at the University of Bradford. Other positions held by Ms Taylor in the last five years In France and abroad: none.

ÉRIC TRAPPIER

(57) Born on 1 June 1960, Éric Trappier is a French citizen and a graduate of the École Sud Telecom (formerly Institut National Telecom). Director recommended by the Industrial Partner He started his career in 1984 in the Technical Department of Dassault Aviation as head of systems development for the ATL2 and Mirage 2000. 3 Member of the Governance and Remuneration Committee In 1991, he became Director of Sales in Asia (India), and in 1996, in the United Arab Emirates. First appointed After serving as Head of Middle East & Africa in 2000 and head of military exports in 2001, he became 19 May 2009 Executive Vice President, International in 2002. Current term expires In 2006, Éric Trappier became Executive Vice President, International of Dassault Aviation. AGM 2018 He was appointed Chairman & Chief Executive Officer of Dassault Aviation in January 2013. Number of shares held He is an Officer of the French Legion of Honour and a Knight of the French National Order of Merit. 500 Thales shares Appointments and other positions held in companies in France and abroad Appointments held in other companies In France: Chairman and Chief Executive Officer of Dassault Aviation (2), Chairman of Gifas, Chairman of Cidef, Director of Sogitec Industries. Abroad: Chairman of Dassault Falcon Jet Corporation (USA), Director and Chairman of Dassault International Inc. (USA), Chairman of the ASD (Belgique), Co-Chairman and Director of Dassault Reliance Aerospace Limited (DRAL) (India) and Director of Dasbat Aviation LLC (United Arab Emirates). Other positions held by Mr Trappier in the last five years In France: Managing Director of Rafale International EIG and Dassault International, Permanent Representative of Dassault Aviation on the Boards of Sofresa, Odas, Sofema and Eurotradia. Abroad: none.

(1) A Thales group company. (2) Listed company.

2017 Registration Document — THALES 145 Corporate governance — Composition of the Board of Directors at 31 December 2017

MARIE-FRANÇOISE WALBAUM

(67) Born on 18 March 1950, Marie-Françoise Walbaum, a French citizen, is a graduate in economics and sociology from Paris X University. Director recommended by the Industrial Partner She began her career at BNP Paribas in 1973 and held various posts in retail banking and credit analysis until 1981. From 1981 to 1994, she served as senior auditor of BNP’s Inspectorate General, Chief Executive First appointed Officer for mutual funds and Chief Executive Officer of the brokerage firm Patrick Dubouzet S.A. In 1994, 17 September 2013 Marie-Françoise Walbaum became Head of Listed and Unlisted Equity Investments and Private Equity Current term expires Portfolio Manager at BNP Paribas, a firm she left in the summer of 2012 after a career spanning 39 years. AGM 2018 Appointments and other positions held in companies in France and abroad Number of shares held Appointments held in other companies 500 Thales shares In France: independent director of Esso (and Chairman of the Audit Committee), FFP (and member of the Finance and Audit Committee and the Governance, Appointments and Remunerations Committee), Imerys (and member of the Audit Committee, the Appointments Committee and the Compensation Committee), and member of the Supervisory Board of Isatis Capital. Abroad: none. Other positions held by Ms Walbaum in the last five years In France: director of Vigeo. Abroad: none.

3.1.1.2 Employee representatives

ANNE- MARIE HUNOT- SCHMIT

(53) Born on 4 October 1964, Anne-Marie Hunot-Schmit is a French citizen and a graduate of the IAE de Paris business school. After receiving a postgraduate degree in Applied Mathematics, she joined Dassault Director representing Electronique in 1987 as a software developer, where she filed the first patent for a ground collision employees avoidance system (GPWS/ GCAS). In 1998, Ms Hunot-Schmit joined the first contract management team for Member of the the Mirage 2000- 9 programmes. Strategic & CSR Committee In 2007, she began working at Thales’ registered office, where she was responsible for international First appointed business ethics standards and subsequently became head of the Price Control Department. 9 December 2016 Since autumn 2016, she has been in charge of Financial Controlling for bids and projects within the Ground Current term expires Transportation Business Unit. 8 December 2020 No appointments or positions held in other companies. Number of shares held • 200 Thales shares; • 48 Thales shares under the Group savings scheme. Not required to hold Thales shares (Article L. 225- 25, paragraph 3 of the French Commercial Code).

146 THALES — 2017 Registration Document Composition of the Board of Directors at 31 December 2017 — Corporate governance

FRÉDÉRIQUE SAINCT

(59) Born on 19 December 1958, Frédérique Sainct is a French citizen and holds a degree in Engineering from the École Centrale de Paris. In 1984, she began working for Aérospatiale Cannes, which became Alcatel in Director representing 1998, and in 2007, she joined Thales Alenia Space. employees Frédérique Sainct has worked in various areas in the satellite business, including attitude control and mission Member of the Audit analysis for telecommunications customers in Europe and abroad. and Accounts Committee Since 2006, she has been a technical expert for the “In- orbit operations” (Opérations en orbite) division. Member of the Governance and Remuneration Committee No appointments or positions held in other companies. First appointed 9 December 2016 Current term expires 8 December 2020 Number of shares held • 10 Thales shares; • 20 Thales shares under the Group savings scheme. Not required to hold Thales shares (Article L. 225- 25, paragraph 3 of the French Commercial Code).

To the knowledge of Thales: • there are no family ties between members of the Board of Directors; • no Board member has been convicted of fraud in the last five years; • no Board member has been involved in the last five years as a senior executive in a bankruptcy, receivership or liquidation, or has been charged and / or officially disciplined by statutory or regulatory authorities; • no Board member has been barred in the last five years by a court from acting as a member of a body dedicated to the administration, management or supervision of an issuer, or from being involved in the management or running of such a company’s affairs; • no conflict of interest exists between the Board members’ private interests and their duties to Thales. 3 3.1.2 Other persons attending board meetings (without voting rights)

In addition to the secretary of the Board of Directors and members of statutory and regulatory provisions concerning defence contractors and corporate management who may be invited by the chairman to attend companies engaged in the manufacture and sale of defence Board meetings, depending on the agenda, the following persons are equipment. invited to attend all Board meetings in an advisory capacity: Representative of the central works council Representative of the French state’s Marielle Marichy, 54, Union Steward. golden share Appointed by the central works council as its representative on the Bertrand Le Meur, 52, General Armaments Engineer. Board of Directors of Thales, pursuant to Article L. 2323- 65 of the Appointed by decree of the Minister of the Economy, Manufacturing French Labour Code (Code du travail). Recovery and Digital Technology on 3 July 2014. The statutory auditors Representing the French State on the Thales Board of Directors in accordance with decree No. 97-190 of 4 March 1997 concerning the Are invited to attend, at a minimum, the Board meetings relating to the French State’s golden share (see page 182) and pursuant to Article 10 audit or approval of the financial statements, as provided for by law. of the Company’s Articles of Association. They may also be invited by the Chairman to attend other Board meetings when their presence could be of particular value to the Government commissioner discussion. The following were invited to Board meetings during the 2017 financial year: Paul Fouilland, 62, General Army Inspector on special assignment (Contrôleur Général des Armées en mission extraordinaire). • Ernst & Young Audit, represented by Philippe Diu, partner; Mazars, represented by Jean- Marc Deslandes, partner. Appointed Government commissioner to Thales and its subsidiaries by • decision of the Minister of Defence of 15 September 2014, under the

2017 Registration Document — THALES 147 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

3.2 REPORT OF THE BOARD OF DIRECTORS TO THE GENERAL MEETING OF 23 MAY 2018 ON CORPORATE GOVERNANCE

Based on the recommendation of the Governance and Remuneration In accordance with French law, in 2008 the Company decided to refer Committee, the Board of Directors approved, at its meeting on voluntarily, when preparing the Chairman’s report, to the Corporate 5 March 2018, this report on corporate governance, drawn up in Governance Code for Listed Companies published by the AFEP and accordance with the provisions of Article L. 225- 37 of the French MEDEF, which was amended most recently in November 2016. Commercial Code, and asked the Chairman to present it to the Annual General Meeting of 23 May 2018.

3.2.1 Governance

In accordance with French law, in 2008 the Company decided to refer which was amended most recently in November 2016 and can be viewed voluntarily, when preparing the Chairman’s report, to the Corporate on the AFEP website at http://www.afep.com /publications / code- afep- mede Governance Code for Listed Companies published by the AFEP and MEDEF, or at the Company’s registered office.

“Comply or explain” rule (information covered by Article L. 225-37- 4 8° of the French Commercial Code) The Company complies with the recommendations contained in the AFEP-MEDEF code as amended in November 2016, except for those concerning:

Heading AFEP-MEDEF Thales at Explanation 5 March 2018 A. Independent directors (ratios): • Board of Directors 1 / 3 (controlled companies) 31% The terms of the shareholders’ agreement do not allow compliance Audit and Accounts Committee • 2 /3 1 /3 with the ratios of the AFEP-MEDEF • Governance and Remuneration Committee > 50% 1 /3 code. B. Succession plan for the Company A Board Committee No Under the terms of the above - representative (Chairman and CEO of Thales) draws up a succession mentioned agreement, the appointment plan for the Chairman of the Chairman and CEO is decided and CEO by both shareholders.

3.2.1.1 Composition and procedures for the organization and operation of the Board of Directors (information covered by Article L. 225- 37-4 5° of the French Commercial Code)

Restatement of the rules of the shareholders’ Of the 14 directors appointed by the General Meeting, 4 are “external agreement and composition of the Board of Directors directors” selected jointly by the Public Sector and Dassault Aviation, 1 is the representative of employee shareholders, and the others are The Company is a société anonyme (French public limited company) recommended to the General Meeting by the Public Sector (5) and by with a Board of Directors. Under the terms of the shareholders’ Dassault Aviation (4). agreement between the Public Sector and the Industrial Partner (Dassault Aviation), as published by the French financial markets The shareholders’ agreement also requires the Chairman and CEO to authority (Autorité des marchés financiers – AMF), the Board of Directors be chosen based on the joint proposal of the Public Sector and is composed of 16 directors, 14 of whom are appointed by the Dassault Aviation (or the Chairman of the Board and the Chief General Meeting and 2 of whom are appointed by the trade unions, in Executive Officer if the separation of these roles has been jointly agreed accordance with the law (Article L. 225-27 et seq. of the French by the two shareholders) and at least one director representing each of Commercial Code) and the Articles of Association (Article 10). the parties to sit on each of the Board Committees.

148 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

Directors 1st appointment Positions currently held Committees* Attendance 2017 at 31 December 2017 Starts Ends S&C A&A G&R Number of sessions taken into account and attendance percentage (e)

Boards Committees Appointed by the Annual General Meeting (14)

Recommended by the Public Sector (5) Patrice Caine, Chairman and CEO (a) 12 /23 / 2014 12 /23 / 2014 2018 OGM ■ 9 100% 3 100% Laurence Broseta (proposed by the State – Article 6 of Order No. 2014- 948) 05 / 14 / 2014 5 / 17 / 2017 2021 OGM 9 78% N / A N /A Bernard Fontana (b) 1 / 30 / 2018 1/ 30 / 2018 2021 OGM ■ N / A N / A N / A N /A Odile Renaud- Basso 7 /19 / 2017 7 /19 / 2017 2021 OGM ■■ 4 50% 2 100% (representative of the French State appointed by decree – Article 4 of Order No. 2014- 948) (c) Seat vacant (d) 11 /29 / 2016 n / a 2021 OGM N / A N / A N / A N /A

Recommended by the Industrial Partner (Dassault Aviation) (4) Charles Edelstenne (a) 5 / 19 / 2009 5 /14 / 2014 2018 OGM ■ 9 100% 3 100% Loïk Segalen (a) 5/ 19 / 2009 5/ 15 / 2012 2018 OGM ■ 9 89% 6 100% Éric Trappier (a) 5/ 19 / 2009 5/ 15 / 2012 2018 OGM ■ 9 89% 6 100% Marie- Françoise Walbaum (a) 9 / 17 / 2013 5 / 14 / 2014 2018 OGM 9 100% n / a n /a

Representative of employee shareholders (1) Philippe Lépinay 4 /01 / 2017 5/ 17 / 2017 2021 OGM ■ 9 100% 3 100%

External directors (4) Yannick d’Escatha 5/ 19 / 2009 5 /18 / 2016 2020 OGM ■ 9 100% 6 100% Armelle de Madre 6/ 28 / 2017 6/ 28 / 2017 2019 OGM 5 80% N / A N /A Anne- Claire Taittinger (a) 5 /15 / 2012 5/ 15 / 2012 2018 OGM ■ 9 100% 6 100% Ann Taylor (a) 5 /15 / 2012 5/15 / 2012 2018 OGM 9 78% N / A N /A 3

Appointed by the trade unions (2)

Anne- Marie Hunot- Schmit 12 /09 / 2016 12 /09 / 2016 8 / 12 / 2020 ■ 9 89% 3 100% Frédérique Sainct 12/ 09 / 2016 12 /09 / 2016 8 / 12 / 2020 ■■ 9 100% 12 100%

(a) Director whose mandate reaches maturity on the date of the General Meeting of 23 May 2018 and whose renewal will be proposed at this meeting. (b) Seat vacant on 31 December 2017 and filled on 30 January 2018 by Mr Bernard Fontana, co- opted on the proposal of the State, in application of Article 6 of Order No. 2014- 948 of 20 August 2014 relating to governance and transactions on the capital of publicly owned companies. (c) Ms Odile Renaud- Basso, who resigned as a director on 29 January 2018, was confirmed as representative of the French State, which was co- opted in her place on 30 January 2018, on the proposal made in application of Article 4 of Order No. 2014- 948. (d) Seat vacant on 31 December 2017 and not yet filled on 5 March 2018. (e) Attendance is calculated compared to the total number of sessions where the director was in office.

* Committee: Strategic and CSR (S&R), Audit and Accounts (A&A) and Governance & Remuneration (G&R). Status: ■ Member, ■ Chair.

2017 Registration Document — THALES 149 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

The other positions held by the members of the Board of Directors and The Governance and Remuneration Committee carefully examined the their biographical information can be found in Section 3.1. As responses it received to a detailed questionnaire (covering all the recommended by the AMF, this section identifies any positions held in independence criteria defined by the amended AFEP-MEDEF code) that Group companies and in other listed companies, in France and it updated and sent out to each “external director” in early abroad. January 2018. The term of office of directors was reduced from six to four years by the Among these, only Ms Armelle de Madre, as Director of Human General Meeting of 24 May 2013, effective from the 2014 General Resources of Arkadin, performs a professional activity in a group that Meeting. has business relationships with Thales (see page 143 of biography). Arkadin and the NTT Group companies to which she belongs provide At the end of 2017, the average age of the directors was 60.4. At the Thales group with miscellaneous telephony, event organization and said date, in the absence of a specific provision in the Articles of network integration services. Association, the age of the directors was governed by common law: The Committee noted that the total sum of revenues made by Arkadin the number of directors over the age of 70 may not exceed • and NTT Group companies with Thales was very significantly below one-third of the directors in office, in accordance with Article the threshold of 1% of the revenues of Thales, on the one hand, and of L. 225- 19 paragraph 2 of the French Commercial Code; Arkadin and of relevant NTT Group companies on the other hand; the • the age limit for the Chairman is 65, in accordance with Article threshold of 1% was set by the Board as a threshold of materiality in L. 225- 48 of the French Commercial Code. assessing whether the business relationship was significant or not. Given the responses to the other sections of the questionnaire, the Governance procedures: non- separation Committee concluded that, on this basis, nothing indicated that (information covered by Article L. 225-37- 4 4° Ms Armelle de Madre’s judgment would be compromised while of the French Commercial Code) carrying out her duties as a director of Thales and that nothing may The Company is a société anonyme (French public limited company) keep her from being qualified as an independent director by the Board. with a Board of Directors and there is no separation of the positions of The three other “external directors” stated that they have no business Chairman of the Board of Directors and Chief Executive Officer. relationship with either the Company or the Group. In the Committee’s On 13 May 2015 during the confirmation of Mr Patrice Caine’s opinion, the questionnaires did not contain any responses that call into appointment as Chairman and CEO, the Board of Directors ruled that question these individuals’ qualification as independent directors. the absence of separation does not affect the active and efficient In conclusion, on the recommendation of the Governance and exercise of its monitoring and supervisory functions, considering that the Remuneration Committee, the Board of Directors decided to qualify responsibilities of the Board of Directors, the role of each of its Ms Armelle de Madre, Ms Anne- Claire Taittinger, Ms Ann Taylor and Committees, and the limits applying to the powers of the Chairman and Mr Yannick d’Escatha as independent directors. CEO are clearly established (see the extract from Section II of the Board’s rules of procedure and Section 3.2.1.5 below). As of 5 March 2018, the closing date of the 2017 financial statements, the Board of Directors had four independent directors, or 31% of its The Chairman and CEO’s compensation is reviewed by a Committee and members based on a full Board with no vacancies (excluding directors later by the Board of Directors in the absence of the concerned party. representing employees and employee shareholders, as stipulated by During Board visits to Group sites, and in particular during the Board of the amended AFEP- MEDEF code). The proportion is, however, slightly Director’s annual review of its strategic plan, directors may organize less than the one- third recommended for controlled companies. meetings without any senior executives in attendance, including the Chairman and CEO, Thales’s sole Company representative. Rules of procedure for the Board of Directors and its Committees Increasing the number of women The Board’s rules of procedure, adopted in July 2004 and amended on the Board of Directors most recently by the Board on 27 February 2017, do not supersede the The objectives set by French law No. 2011-103 of 27 January 2011 on provisions of the law or of the Company’s Articles of Association gender balance on corporate boards of directors and the monitoring of applicable to the Board and its Committees, or the provisions of the professional equality (both men and women must represent a minimum Code of Ethics or the Code on Insider Trading, certain provisions of of 40% of the directors appointed at the General Meeting, excluding which apply to directors, since together these rules represent a code employee representative directors) were achieved on 29 November 2016 of professional conduct for directors (see “Prevention of insider trading” (6 women out of 14 directors, or 43%). below). On 31 December 2017, the percentage of women on the Board of Thales In addition to the specific provisions of the shareholders’ agreement, the (excluding employee representatives) reached 50% (6 out of 12 directors), Board’s rules of procedure include best practices in respect of corporate and 57% when taking account of employee representative directors. governance, particularly those contained in the aforementioned AFEP-MEDEF code. The Governance and Remuneration Committee is Independence of directors in charge of periodic updates and of sending the Board the revisions that it deems necessary. According to the rules of procedure, the Board of Directors, based on the report of the Governance and Remuneration Committee, conducted The Board’s rules of procedure are divided into five sections: its annual review on 5 March 2018 of the situation of its members with I) Members of the Board of Directors reference to the definition of and criteria for independent directors, as (Board membership, independence, availability, primary duty, specified by the amended AFEP- MEDEF code. transparency, confidentiality and compensation) The Board of Directors has decided to retain the strict approach The rules of procedure stipulate that: adopted in previous years: directors appointed by the General Meeting on the recommendation of either a “Public Sector” or “Industrial Partner” • the members of the Board of Directors must inform the Chairman of shareholder, or a category of shareholders (employees), or directors all management or administrative positions that they hold; appointed by the trade unions, cannot be considered independent • each Company representative must obtain the opinion of the Board within the meaning of the amended AFEP-MEDEF code. As part of this before accepting a new corporate office in a listed company; approach, only directors who qualify as “external directors” under the terms of the shareholders’ agreement may be qualified as independent directors (i.e. no more than 4 out of 16).

150 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

• directors must inform the Board of any conflicts of interest, even IV) Board Committees potential, and should, in such cases, refrain from voting on the (formation and responsibilities, organization, information, corresponding matter. Audit and Accounts Committee, Governance and Remuneration Committee, Strategic and Corporate Social Directors must also inform the Chairman of any proposed agreement Responsibility Committee) involving them directly or indirectly which may, pursuant to the French Commercial Code, need to receive the prior authorisation of the Board It is stipulated that, in addition to the responsibilities of each Committee of Directors. (see relevant sections below), each Committee is entitled to ask corporate management for any additional information that it deems In addition, the directors have individually issued a statement regarding necessary for the performance of its duties, and may, in exceptional the following points: cases, ask the Board of Directors to hire external consultants. no Board member has any family ties with another member of the • V) Functioning of the Board of Directors Board of Directors or any members of corporate management; (meetings, attendance and representation, • no Board member has been convicted of fraud in the last five years; annual assessment and updating the rules of procedure) • no Board member has been involved in the last five years as a This topic is covered in the minutes of the Board of Directors’ activities, senior executive in a bankruptcy, receivership or liquidation, or has as required by law, in Section 3.2.1.2 below. been charged and /or officially disciplined by statutory or regulatory authorities; Prevention of insider trading • no Board member has been barred in the last five years by a court In order to take into account any applicable regulations and the from acting as a member of a body dedicated to the administration, recommendations contained in the AMF guide, Thales has implemented management or supervision of an issuer, or from being involved in a system of “blackout periods” (no- trading periods): in addition to the the management or running of such a company’s affairs; periods relating to the annual and half-yearly financial statements (at least 30 calendar days, in each case), two periods of at least 15 days • no conflict of interest exists between the private interests of each of each have been introduced for quarterly reporting (first and third the Board members and their duties with regard to Thales. quarters). In each case, the period includes the day following the II) Powers of the Board of Directors publication of the financial press release. (representation and corporate interests, The financial calendar for the following six months is published on the specific powers and shareholders’ agreement) Company’s website after the third quarter financial press release The annual budget, the strategic plan, the appointment and dismissal of (including the date of the General Meeting). The calendar is updated the Chairman and CEO (or the appointment of a Chairman and a for the whole year when the previous year’s annual results are Chief Executive Officer in the event of separation or potential published. separation of these positions), acquisitions or disposals of shareholdings The directors have been informed by the Company of their obligation to or assets with a value exceeding €150 million (as total commitments or refrain from carrying out any transactions on Thales shares and related as revenues), as well as strategic alliance agreements and agreements financial instruments during the blackout periods relating to the annual on technological and industrial cooperation, are automatically and half- yearly financial statements as well as the quarterly financial submitted to the Board for approval, it being understood that the information, as defined by the Company, and when they have any shareholders’ agreement stipulates that such decisions must also be insider information (within the meaning of the applicable regulations). approved by the majority of directors representing the Industrial Partner (Dassault Aviation). The directors have also been informed of any disclosure requirements with regard to the AMF and the Company concerning the transactions Any transactions exceeding €50 million are also submitted to the mentioned in Article L. 621-18- 2 of the French Monetary and Financial Board for approval if they involve a change in the Group’s strategy as 3 Code (Code monétaire et financier), and of their obligation to provide previously approved by the Board. the Company with a list of people they are closely connected to and III) Board information inform said people of their own obligations. (communication and training) Directors may, if they wish, consult the Company Secretary or the In particular, it is expected that: Group General Counsel prior to dealing in any shares. However, this prior consultation is not compulsory. • Board documents shall be sent to participants in a timely manner; • the French State representative responsible for the golden share, the Obligation to hold a minimum number of shares Government Commissioner and the representative of the Central In application of Article 10.3 of the Articles of Association, each Works Council shall receive all documents sent to directors and are director must hold at least 500 shares, unless legally exempt. The invited to attend Board meetings; Chairman and CEO is also subject to an obligation to retain shares that • new directors shall receive, upon their appointment, the appropriate they hold as part of their long- term compensation (see Section 3.2.2.2 B). documents for their office and shall attend a briefing on the Company, its organisational structure and its business, given by the Summary of the transactions mentioned in Article Group’s senior executives. Thereafter, each director may request L. 621-18- 2 of the French Monetary and Financial additional training. Code carried out in 2017 The summary statement (provided for in Article 223-26 of the AMF General Regulations) of the transactions mentioned in Article L. 621-18- 2 of the French Monetary and Financial Code carried out in 2017 by persons required to file a disclosure can be found in Section 4.2.3.7.

2017 Registration Document — THALES 151 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

3.2.1.2 Minutes of the Board Additional training of Directors’ activities In accordance with the Board’s rules of procedure, directors may ask to during 2017 receive additional training. Organization and operation of Board Committees Number of meetings and attendance rate The Board of Directors has three Committees: an Audit and Accounts The Board of Directors met nine times in 2017, including four times away from Committee, a Governance and Remuneration Committee and a head office. The average attendance rate for directors was 86%. The Strategic and Corporate Social Responsibility Committee. individual attendance rates are specified above in Section 3.2.1.1. Audit and Accounts Committee The statutory auditors are invited to meetings relating to the audit of the At 31 December 2017, the powers and duties of this Committee, which annual and half- year financial statements. In addition, they may be are reproduced in the Board’s rules of procedure (Article 16), reflect, on invited to other Board meetings when a report on the work carried out the whole, the framework set out in the order of 8 December 2008 by the Audit and Accounts Committee is presented and when their implementing Directive 2006/ 43 /EC and are also compliant with EU attendance may be of particular value to the discussion. Regulation No. 537 / 2014 of 16 April 2014: Key topics covered “The Audit and Accounts Committee acts under the responsibility of the Board of Directors. Without prejudice to the powers of the Board of In addition to recurring items within the remit of the Board of Directors Directors, it is specifically responsible for the following tasks: (annual budget and update of forecasts, strategic plan, preparation of annual consolidated and corporate financial statements, review of the a) it monitors the process of drawing up the financial information and, consolidated half-year financial statements, calculation of the Chairman where applicable, formulates recommendations to guarantee its and CEO’s compensation and indication of the quantitative and integrity; qualitative criteria for his variable compensation, dividend and interim b) it monitors the effectiveness of internal control and risk management dividend proposal, approval of Annual Meeting documents and notice systems, as well as the internal audit where applicable, with regard of the General Meeting, announcement of blackout periods for trading to procedures relating to the preparation and processing of the in the Company’s shares, prior approval if applicable for related- party accounting and financial information; commitments or agreements, various delegations of powers to the c) it supervises the selection procedure for the statutory auditors and Chairman and CEO and reporting on the use of such powers, annual issues a recommendation to the Board of Directors on the statutory review of the independence of the directors, etc.), the agendas of these auditors proposed for appointment by the General Meeting, meetings included the following items in 2017, in some cases with including the renewal of their mandate; reports from the relevant Board Committee: d) it monitors fulfilment by the statutory auditors of their mission, taking account of the findings and conclusions of the Haut Conseil du the monitoring of strategic decisions and sensitive issues; • Commissariat aux Comptes (Audit Office Control Board) following the review of various M&A projects, including the planned takeover • audits performed; bid for Gemalto; e) it ensures compliance by the statutory auditors with the terms and the revision of the Board’s rules of procedure; • conditions of independence prescribed by current regulations; the introduction of an annual long-term incentive (LTI) plan with • f) it approves, within the framework authorized by the Board of performance conditions and that includes Group employees; Directors, the provision by the statutory auditors or members of their the annual assessment of the Board’s performance; • respective networks, services other than the certification of the the Human Resources function. • financial statements of the Company and the companies that it controls directly and indirectly. It reviews and validates related 3.2.1.3 Preparatory work procedures and ensures their compliance. for board meetings It consults the statutory auditors on the following: a) their general program of work as well as the various sample tests they have performed; Information for directors b) changes that they believe should be made to the financial Board documents statements to be published or to other accounting documents, making any relevant comments on the assessment methods used in Each year, a provisional timetable for meetings is drafted halfway their preparation; through the year for the following year. c) any irregularities and inaccuracies they may have discovered; The Board’s rules of procedure have set the period for the notice of d) conclusions resulting from the aforementioned comments and meeting and provision of documents at five working days, unless this is adjustments to the profits for the period compared to those of the impossible or there is an emergency – in which case three days is previous period; considered a desirable minimum. e) risks to their independence and the safeguards applied to mitigate these risks; Each notice includes the agenda and meeting documents (or at least f) significant internal control weaknesses they may have identified, as the main points, if the documents cannot be completed at the time of regards procedures relating to the preparation and processing of dispatch) and the draft minutes of the previous meeting, usually sent out accounting and financial information. initially within one month of each meeting. In some cases, additional material is sent to directors after the notice of meeting, or may even be It receives from them each year: handed out during the meeting, if the matter is urgent. a) a statement of independence; The directors are also sent a press review and a selection of financial b) an update of the information provided for their appointment, analyses relating to the Company. National press releases are sent to detailing the services provided by members of the network to which them directly by e- mail. the statutory auditors belong, as well as services other than the certification of the financial statements that they have provided; Since 2015, the prior sending of documents by email, which can be c) the additional report under Article 11 of EU Regulation No. accessed on dedicated secure tablets, has enabled the timeframe for 537 / 2014. provision to be optimised; the documents are then sent out in paper form to directors based on their request.

152 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

Each year it examines the budget for professional fees for the statutory • the section of the Chairman’s report for 2016 covering internal auditors. It reviews and analyses the professional fees paid to the control and risk management. statutory auditors for the preceding financial year. During meetings more specifically devoted to audit and internal control, The Committee relies in particular, for performing its duties, on the work the Committee reviewed the reports of the Audit, Risks & Internal Control of the Finance department and the Internal Audit department. It Department. It laid out its recommendations for the follow-up on approves the annual programme of the Internal Audit department and assignments. examines the activity reports. At the meeting devoted to the financial statements, the Committee It reports regularly to the Board of Directors on its work and the results of acknowledged the memorandum on the Group’s risk exposure and its mission to certify the financial statements, the way in which this major off-balance sheet commitments, in accordance with AFEP- MEDEF mission contributed to the integrity of the financial information and the recommendations. This memorandum, which was circulated to all directors, role that it played in this process. It informs the Board of Directors is included in the section of the 2016 Registration Document on “Risk immediately of any problems encountered.” factors” (see Section 1.1.2 of the management report). In addition, since 2010, with reference to the final AMF audit The Committee was also involved in the preparation of financial press committee report of 22 July 2010, Committee members have been able releases relating to the results and to the implementation of the IFRS 15 to have a discussion with the statutory auditors at the end of each standard. meeting without any meeting secretary or Thales representatives being Following the meetings – which, in the case of the closing or present. examination of the financial statements, are held at least two (and On 31 December 2017, the members of the Committee were: wherever possible three) days prior to the Board meeting – a written report is produced and submitted to all directors at the next Board Anne- Claire Taittinger, Chairman and independent director; • meeting. Pursuant to the AMF recommendation in its audit working Frédérique Sainct, director representing employees; • group report on audit committees of 22 July 2010, this report is Loïk Segalen. • systematically included or attached to the minutes of the next Board Mr Bernard Fontana joined this Committee from 30 January 2018. meeting after being approved by the Committee. In addition, the Committee proceedings are recorded in the minutes, which may be The composition of the Audit and Accounts Committee is consistent with more detailed. the provisions of the French Commercial Code: the Committee members are all directors and one director, the Chair of the Committee, Governance and Remuneration Committee in addition to being qualified as an independent director, has the In compliance with Section 17 of the Board’s rules of procedure, the requisite financial, accounting and statutory audit expertise (see Governance and Remuneration Committee has the task of examining: biography of Ms Anne- Claire Taittinger on page 144). • the compensation policy for the Company’s senior executives; Nevertheless, independent directors make up only one- third of the • the compensation of the Chairman and CEO and any related-party Committee’s membership and not two- thirds, as recommended by the commitment concerning him, the compensation of the directors AFEP-MEDEF code (the director representing employees, Ms Frédérique (attendance fees) and, if applicable, that of other Company Sainct, is not included in this calculation). As previously mentioned, this representatives; is due to the terms of the shareholders’ agreement, which stipulates that • the proposed long- term incentive (LTI) plans, which are submitted to one representative of each of the two shareholders in the agreement the Board; must sit on each Committee. With regard to the Audit and Accounts • the proposed employee share ownership schemes; Committee, this comprised Ms Delphine Gény-Stephann until • candidates for external directors, regarding whom the two major 24 November 2017, who was replaced by Mr Bernard Fontana, shareholders held consultations in accordance with the provisions of appointed on 30 January 2018 on the recommendation of the Public the aforementioned shareholders’ agreement; Sector, and Mr Loïk Segalen, appointed on the recommendation of 3 • at least once a year, the independence of the directors; Dassault Aviation. • and in general, any issues relating to the application of the The Committee met six times in 2017, with an attendance rate of 100%. AFEP- MEDEF Corporate Governance Code for Listed Companies. The statutory auditors, invited to all Committee meetings, are involved in The Committee is also responsible for preparing the Board’s assessment all discussions, except when there is a conflict of interest (e.g. during a of its own performance (see Section 3.2.1.4 below) and reporting on it review of the appointment of statutory auditors or renewal of their terms to the Board in order to facilitate discussion. of office). Twice a year, they submit their report on the audit of the On 31 December 2017, the members of the Committee were: accounts (annual and half year), and specify the accounting options used and the highlights of their audit of the financial statements. • Yannick d’Escatha, Chairman and independent director; • Frédérique Sainct, director representing employees; The Senior Executive Vice President, Finance and Information Systems, • Éric Trappier; the Company Secretary and the director of Audit, Risks & Internal • Odile Renaud- Basso. Control are invited to all meetings, as is the Group director of Financial Control and, periodically and depending on the agenda, other It met six times in 2017, with an attendance rate of 100%. representatives of the Finance department and the Group General The ratio of independent directors recommended by the AFEP-MEDEF Counsel. code (at least half) is not met, because it currently stands at one-third In addition to the annual and half-year financial statements, in 2017 the (the director representing employees, Ms Frédérique Sainct, is not Committee also reviewed: included in this calculation pursuant to the AFEP- MEDEF code). As previously mentioned, this is due to the terms of the shareholders’ • the execution of difficult contracts and their accounting implications; agreement, which stipulates that one representative of each of the two • the follow- up of the main disputes; shareholders in the agreement must sit on each Committee. Ms Odile • the external audit plan and statutory auditors’ fees; Renaud- Basso was appointed to the Governance and Remuneration • the organisation of internal control, updates to the risk mapping and Committee on the recommendation of the Public Sector and Mr Éric assessment of the implementation of the annual audit plan; Trappier was appointed on the recommendation of Dassault Aviation. • the audit plan for 2018; • the independence of a statutory auditor in view of the rotation of their account signatory partners; • the implementation of IFRS 15, a new revenue recognition standard applicable in 2018; and

2017 Registration Document — THALES 153 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

The Senior Executive Vice President, Human Resources, and the In 2017, the Senior Executive Vice President of Finance and Information Company Secretary were invited to all Committee meetings, and the Systems, the Company Secretary, the Senior Executive Vice President of Chairman and CEO was invited to some of the meetings, depending Operations & Performance and the Executive Vice President of Strategy on the agenda or in cases where his presence could be of particular were invited to meetings by the Chair of the Committee. Minutes of value to the discussion. each meeting were presented at the following Board meeting by the Chairman and CEO, as Chair of the Committee, either verbally or The items reviewed by the Committee in 2017 included: accompanied by a report. the Group’s long-term incentive (LTI) policy and the preparation of a • The meetings of the Strategic and Corporate Social Responsibility free share plan with performance conditions according to the level Committee are the subject of minutes. of responsibility of the beneficiaries; • the examination of the compensation package for the Chairman and CEO and in particular the qualitative criteria applicable for his variable compensation; 3.2.1.4 Assessment of • the revision of the Board’s rules of procedure; the Board’s performance • the independence of the directors; • the terms for the annual assessment of the performance of the Board Since 2011, the Company has conducted a formal self-assessment, of Directors, the choice of external consultant pertaining to it and the based on the personal interviews of directors with the Company related report presented to the Board; Secretary preceded, until 2015, by a detailed questionnaire and, in • as well as this section of the Chairman’s report on corporate 2016, without a preliminary questionnaire but using an interview guide governance. prepared by the Company Secretary with the Chair of the Governance and Remuneration Committee. For all of these items, the Committee presented its recommendations to the Board: each meeting was systematically recorded in minutes issued In 2017, the Board decided to conduct an external assessment, given, to all directors at the following Board meeting. In addition, the on one hand, the length of time since the last external assessment (six Committee proceedings are recorded in the minutes, which may be years) and, on the other hand, the opportunity to combine this exercise more detailed. with the end of the three-year term of office of the Chairman and CEO in anticipation of its renewal at the end of the 2018 General Meeting. The Strategic and Corporate Social Responsibility Committee The results of this assessment were reported to the Governance and In compliance with the Board’s rules of procedure, the Strategic and Remuneration Committee and then to the Board of Directors on 22 and Corporate Social Responsibility Committee’s main tasks are to assess 30 January 2018 respectively. the Group’s strategy in its key business segments, and in particular: The directors were unanimous in acknowledging that the Board and its • to examine the Group’s strategic approach in each of its major Committees are working well and a majority of them consider that its fields of operation, before these are submitted to the Board of operation has improved even further since they have been Board Directors; members. The directors particularly commended the quality of the Board documents and presentations, as well as its discussions in • to analyse the framework for submission of the budget and the plenary sessions and the quality of its annual strategic seminar. three-year rolling plan to the Board, and to examine the proposed annual budget in the context of this plan; Concerning the composition of the Board, the directors issued a positive assessment: the expertise and experience of its members are • to analyse major acquisitions and asset disposal plans (in excess of varied, complementary and cover the majority of the business sectors in €150 million), as well as proposed strategic agreements or which the Group is present (aviation, defence, space, transport, etc.) as partnerships. well as finance, industry, human resources and digital; its composition is The Board of Directors, at its meeting on 27 February 2017, decided balanced in terms of gender; the proportion between directors with the to add corporate social responsibility to these duties, pursuant to the greatest length of service on the Board and those appointed more AFEP-MEDEF code as amended in November 2016 (see Section 3, recently is deemed appropriate. The Board wanted the balance of its “The Board of Directors and Strategy”). As a result of these new duties, composition to be analysed at each renewal to encourage diversity of the Committee is henceforth known as the “Strategic and Corporate profiles and skills. Social Responsibility Committee”. In addition, the external assessment revealed that the individual On 31 December 2017, the members of the Committee were: contributions of directors to the work of the Board of Directors and its Committees are satisfactory. • Patrice Caine, Chairman; • Charles Edelstenne; The assessment also helped to identify certain areas in which the Board • Anne- Marie Hunot- Schmit, director representing employees; can make further improvements. In particular, it was suggested that the • Philippe Lépinay, director representing employee shareholders; Board might discuss topics of strategic thinking more frequently, in • Odile Renaud- Basso. addition to at the annual strategic seminar and in the work of the Strategic and CSR Committee. Lastly, some areas of improvement were For this type of Committee, no conditions are set for the independence proposed to make the organization and operation of the Board and its of directors, either by law or by the AFEP- MEDEF code. Committees smoother, in particular with a better balance between The Committee met three times in 2017, with a 100% attendance rate, written and oral presentations and the provision at board meetings of mainly to examine the 2017 budget, to follow up on strategic decisions more insights into the work of the Committees. and to review various proposed M&A transactions.

154 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

3.2.1.5 Restrictions to the Chief The right to vote, and consequently the right to attend Annual General Meetings, belongs to the beneficial owner at Ordinary General Executive Officer’s powers Meetings, and to the bare legal owner at Extraordinary General (information covered Meetings. Owners of pledged shares retain their voting rights. Co-owners of shares are represented at Annual General Meetings by by Article L. 225- 37- 4 7° one of the co-owners or by a joint proxy who, in the event of of the French Commercial Code) disagreement, is appointed by the court at the request of the co-owner who acts first. Since 23 December 2014, Mr Patrice Caine has served as Chairman Each person present at the Annual General Meeting has one vote for and CEO, with the confirmation of the principle of non- separation on each share owned or represented, without limitation, subject to the 13 May 2015, with no limitation of powers other than those stipulated following provisions on the right to a double vote, and to the exceptions in the applicable legislation, with respect to the specific powers of the provided by law. Board of Directors or the Annual General Meeting. Shareholders who can prove that their shares have been registered in As stipulated in Section 3.2.1.1 above, the policy is for automatic their name in the Company’s share register (kept by Société Générale, submission for Board approval of any acquisitions or disposals duly authorized for this purpose – see Section 4.3.1 below), for at least exceeding €150 million, as are any non-strategic transactions that two years without interruption, are entitled to double voting rights at exceed €50 million. This practice effectively limits the powers of the Annual General Meetings for each share so held. Registered shares Chief Executive Officer. that have been granted to a shareholder as free shares in respect of shares they already hold with double voting rights attached are also entitled to double voting rights as soon as the shares have been 3.2.1.6 Other information granted. Double voting rights automatically end for any share that is converted to Notice of Annual General Meetings bearer form or is transferred (except in the case of inheritance, either and conditions for attendance intestate or by will, spousal community property, inter vivos gifts to a (information covered by Article L. 225-37- 4 9° spouse or relative who may inherit, or in the case of a transfer as a of the French Commercial Code) result of a merger or demerger of a shareholding company). All shareholders, regardless of the number of shares they own, are Double voting rights may be cancelled by a decision of an Extraordinary entitled to take part in Annual General Meetings. They are sent a notice General Meeting, following approval by a special Annual General of meeting and business is transacted according to the law. The date Meeting of Shareholders entitled to double voting rights. and place of the meeting, the agenda and the draft resolutions of the meeting are published in the French Legal Gazette (Bulletin des Under the Articles of Association, there is no limit on voting rights. annonces légales obligatoires, BALO) at least 35 days prior to the date In accordance with the law, shares owned by the Company itself do of the meeting, with the final notice of meeting being sent no later than not carry voting rights. 15 days prior to the meeting. The Board of Directors ensures, in the interests of all shareholders, that the period of notice for meetings is Key factors likely to have an impact much longer than the minimum requirements. in the event of a takeover bid At least 21 days prior to the meeting, all documentation required by (information covered by Article L. 225- 37- 5 current regulations is provided on the Company’s website of the French Commercial Code) (www.thalesgroup.com). It is available for shareholders at the registered The structure of share ownership and the distribution of voting rights office within the statutory deadline. mean that Thales is unlikely to be affected by any public offer. 3 The date of the General Meeting is published on the Company’s Furthermore: website approximately six months in advance. 1. the two main shareholders (Dassault Aviation and TSA) have At the General Meeting of 23 May 2018 and subsequently, declared that they are acting in concert under a shareholders’ shareholders are able to vote electronically. agreement, the key terms of which are described on page 148, which stipulates in particular that the Chairman and CEO is chosen Participation in Annual General Meetings, in any form whatsoever, is based on a joint proposal by the parties; conditional upon registration of the shares in accordance with the conditions and within the time limits provided for under the current 2. in the absence of termination on expiry of the contract on regulations. 31 December 2016, the agreement was tacitly renewed for a period of five years, expiring on 31 December 2021. It may be Any shareholder who has already voted by post or by proxy, or tacitly renewed for five- year periods; requested an admittance card or share ownership certificate, may sell all or some of their shares at any time. 3. any crossing of the threshold of one- tenth or a multiple of one- tenth of the share capital or voting rights of the Company must first be approved However, in accordance with the regulations in force since by the Minister for the Economy; in addition, under the conditions set by 1 January 2015, should the intermediary account-holder notify the Decree No. 93-1296 of 13 December 1993, the Minister Company of a disposal occurring before midnight (Paris time) on the responsible for the Economy may oppose decisions on the sale or second trading day prior to the Annual General Meeting, the Company the allocation as collateral for assets referred to in the appendix of will invalidate or modify the vote, proxy, admittance card or share Decree No. 97- 190 of 4 March 1997 (see Section 4.2.3.3.5). ownership certificate, as the case may be. No sale or other operation carried out after midnight (Paris time) on the second trading day prior to the meeting, irrespective of the means used, is notified by the approved intermediary or taken into consideration by the Company, notwithstanding any agreement to the contrary.

2017 Registration Document — THALES 155 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

General Meeting authorizations valid at 31 December 2017 for increases in capital (information covered by Article L. 225-37- 4 3° of the French Commercial Code) Table prepared pursuant to Article L. 225-37- 4 9° of the French Commercial Code summarizing the use of authorizations (valid at 31 December 2017) granted by the Annual General Meeting for increases in capital.

Annual General Meeting of 18/ 05 / 2016 Used by the Observations Board of Directors Issue of securities giving access to equity capital: No utilisation Overall ceiling (nineteenth resolution) for transactions coming under resolutions with pre- emptive subscription rights (fourteenth resolution): • 15, 16 and 17: 20 million shares 60 million shares and €3 billion in debt securities; and €2 billion in debt securities without pre- emptive subscription rights (fifteenth resolution): • (nineteenth resolution) 20 million shares and €2 billion in debt securities; • without pre- emptive subscription rights by private placement (sixteenth resolution): 20 million shares and €2 billion in debt securities; • possibility of over-allotment (“Green shoe”) (seventeenth resolution): maximum of 15% of issues carried out attributable to each resolution / transaction above. 26 months, i.e. until 17 July 2018 See overall ceilings in observations column

Issue of new shares as consideration for contributions of the securities No utilisation Overall ceiling of resolutions 14, 15, of third-party companies up to a maximum of 21 million securities, 16, 17 and 18: 60 million shares i.e.,10% of share capital (eighteenth resolution) and €3 billion in debt securities (nineteenth resolution) 26 months, i.e. until 17 July 2018 See overall ceilings in observations column

Issue of new shares reserved for employees who are members No utilisation Note: Employee shareholding operations of a Group savings scheme (twentieth resolution – as a legal are now conducted using existing shares, consequence of resolutions on capital increase in cash above) which have previously been bought back by the Company under a share repurchase Ceiling: 2 million shares programme. Maximum discount: 20% for a five- year employee savings plan and 30% for a ten- year holding period Term: 26 months, i.e. until 17 July 2018

Agreements concluded by the subsidiaries with related parties (information covered by Article L. 225-37- 4 2° of the French Commercial Code) During financial year 2017, no agreement was reached, directly or through an intermediary, between, on the one hand, one of the Company representatives or one of the shareholders holding a fraction of the voting rights greater than 10% of the Company’s share capital and, on the other hand, another company of which Thales holds directly or indirectly more than half the share capital, with the exception of current agreements concluded under normal conditions.

3.2.2 Compensation of Company representatives

3.2.2.1 Compensation of The criteria for determining the variable compensation are set at an the Chairman and CEO overall level of 75% financial and 25% non-financial. In order to reward over-performance of the financial criteria, the amount of the payment and other Company relative to these criteria may exceed the target up to 150%. This is not the case for the non-financial portion which is capped at 100%. representatives for Consequently, annual variable compensation is capped at 137.5% of financial year 2017 the target. (i) Financial criteria The annual fixed and variable compensation for 2017 for Mr Patrice Caine was established in accordance with the compensation policy for For the financial part, the criteria were EBIT (35%), order intake (20%), the Chairman and CEO of Thales approved by the General Meeting of and free operating cash flow (20%). The table below sets out the 17 May 2017 (7th resolution). It comprises: achievement level against these three financial criteria. • fixed compensation of €700,000 (gross amount); • a target annual variable compensation of €700,000 in the event of achieving objectives that is capped, in the event of exceeding these objectives, at a maximum of €962,500 (137.5% of the target).

156 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

• FINANCIAL CRITERIA FOR 2017 ANNUAL VARIABLE COMPENSATION

Criteria Weighting Threshold Payment as % of target

EBIT 35% If results <– 90% of budgeted objective 0% If results = 100% of budgeted objective 35.00%

If results >– 120% of budgeted objective 52.50% Variations between 0% and target, and between target and maximum calculated on a straight- line basis

Order intake 20% If results <– 90% of budgeted objective 0% If results = 100% of budgeted objective 20.00%

If results >– 120% of budgeted objective 30.00% Variations between 0% and target, and between target and maximum, calculated on a straight- line basis

Free operating cash flow 20% If results <– budgeted objective – 2% of budgeted revenues 0% If results = 100% of budgeted objective 20.00%

If results >– budgeted objective + 2% of budgeted revenues 30.00% Variations between 0% and target, and between target and maximum, calculated on a straight- line basis TOTAL FINANCIAL CRITERIA 75%

The definition and calculation of these criteria are set out in Section This performance, above the budgeted objective, triggered payment on 1.1.1.2 of the 2017 Registration Document. this criterion. Meeting on 5 March 2018, the Board of Directors examined the results The Board also observed that the Group had recorded an order intake obtained for the financial criteria. of €14,920 million , also above the budgeted objective and the objective of €14 billion communicated to the market. Regarding the Group’s EBIT, the budgeted objective was particularly ambitious since it corresponded to a further year of strong growth of this Lastly, it noted a significant over- performance on the free operating index and to the achievement of a level of EBIT margin never reached cash flow criterion, the Group achieving a record free cash flow level in the Group’s history. The Board observed that, in spite of negative over the year of €1,365 million, corresponding to a conversion rate of currency and scope effects, the Group’s EBIT had reached adjusted net income into free operating cash flow of 139%. As this level €1,543 million in 2017, €53 million above the middle of the objective of achievement exceeded the scale maximum, the compensation for this range communicated to the market (€1,480 million to €1,500 million). criterion was capped. For confidentiality reasons, the achievement of each financial criterion is only represented graphically in the table below. 3 Criteria Achieved Weighting Level reached

Minimum Target Maximum

EBIT (in €m) 1,543 35% ■

Orders (in €m) 14,920 20% ■

Operational free cash flow (in €m) 1,365 20% ■

Financial portion of variable annual compensation (as % of the target) 120.9%

(ii) Non- financial criteria Each of these objectives represents one-fourth of the 25% of the weighting attributed to non- financial criteria. In accordance with the aforementioned compensation policy of the Chairman and CEO of Thales, he was assessed in 2017 on the Meeting on 5 March 2018, the Board of Directors reviewed and achievement of the following four non- financial criteria: discussed the achievements of the Chairman and CEO for each of the four non-financial criteria (Globalization, Leadership, Diversity and Global development strategy: implementation of initiatives to pursue the • inclusion and Digital). It decided to maintain the 2017 achievement level, Group’s global development strategy, focused on selected major countries; i.e. 97.5% of the target. Through this decision, the Board wanted both to • Leadership: deployment of empowerment and accountability highlight the many initiatives and specific achievements obtained against initiatives, deployment of processes for selecting leaders, the four criteria concerned under the leadership of Mr Patrice Caine, as well development of training programmes to prepare the next generation as the progress recorded by the Group, both qualitative and quantitative. of Thales leaders; Following this review and the recommendation by the Governance and • Gender diversity: roll-out of gender diversity initiatives with a target Remuneration Committee, the Board of Directors decided that the for women to represent 40% of new hires over the 2017- 2018 period; variable compensation to be paid in 2018 to Mr Patrice Caine for financial year 2017 should be increased to €805,522, which Digital: deployment of a digital platform, significant strengthening of • represents 115% of the target annual variable compensation. It is noted talents in four key digital technologies (connectivity, big data, that the payment of this variable compensation is subject to the artificial intelligence and cybersecurity) and development through approval of the General Meeting of 23 May 2018 (15th resolution), in targeted acquisitions, as necessary. application of Article L. 225- 100- II of the French Commercial Code.

2017 Registration Document — THALES 157 3_VA_V2 03/04/18 15:28 Page158

Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

On 28 September 2017, the Board of Directors also granted Mr condition over four years. This long-term compensation is detailed in Patrice Caine long-term compensation in the form of a maximum of Table 6 below. 5,000 performance units indexed to the Thales share price, in The components of the compensation of the Chairman and CEO, accordance with the Company representative compensation policy subject to the vote of the General Meeting of 23 May 2018 in approved by the General Meeting of 18 May 2017 (7th resolution). application of Article L. 225-100- II of the French Commercial Code Acquisition of this compensation depends in particular on performance (15th resolution), are detailed in the summary table below. conditions calculated over three financial years and on an attendance

• SUMMARY TABLE OF THE COMPONENTS OF COMPENSATION OF MR PATRICE CAINE, CHAIRMAN AND CEO, FOR 2017

Components of Policy approved by the General Meeting Paid for financial Allocated for financial compensation of 17 May 2017 year 2017 year 2017 (as amount or accounting valuation) Annual fixed The policy provides for a fixed annual compensation of €700,000. €700,000 compensation Annual variable The policy provides for a target annual variable compensation of €805,522 (a) compensation €700,000. The criteria set are as follows: • financial criteria at 75% (see description above). The targets are set by the Board of Directors during the budgetary process but are not made public for reasons of confidentiality; • non-financial criteria make up the remaining 25% of variable compensation (see description above). In the event of over-performance of the financial objectives, the variable compensation may reach a maximum of €962,000, i.e. 137.5% of fixed annual compensation. Total annual €1,505,522 compensation Multiyear None – – variable compensation Long- term The number of units ultimately vested will depend on the level of – €449,400 (b) compensation achievement, calculated over three years, of the following performance conditions: • 40% based on a growth objective measured in terms of average order intake over the 2017- 2019 period; • 40% based on a competitiveness objective measured in terms of cumulative free operating cash flow over the 2017- 2019 period; and • 20% based on Thales’s stock market performance and measured by Total Shareholder Return (TSR) (dividend reinvested). The objectives, thresholds and payment percentages according to the target appear in Table 6 on page 162. Acquisition is also subject to an attendance condition over four years (i.e. until 27 February 2021), except in the event of death or disability. Half of the payment is made in kind with Thales shares and half is made in cash. The detailed conditions of this long-term compensation appear in Section 3.5.1.2 B c) of the 2016 Registration Document. Exceptional None – – compensation Non- competition None – – clause Compensation None – – linked to taking up appointment

(a) The payment of variable annual compensation for 2017 to Mr Caine is conditional upon the approval of the Annual General Meeting of 23 May 2018 (resolution 15). (b) Total determined by multiplying the maximum number of units granted (5,000) by the Thales share price at 31 December 2017.

158 THALES — 2017 Registration Document [© Agence Marc Praquin] 3_VA_V2 03/04/18 15:28 Page159

Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

Components of Policy approved by the General Meeting Paid for financial Allocated for financial compensation of 17 May 2017 year 2017 year 2017 (as amount or accounting valuation) Deferred The Thales Company representative is entitled to deferred incremental – €14,554 incremental and conditional compensation, the amount of which is determined of potential annual deferred and conditional on the basis of an identical allocation method to the Group compensation acquired for 2017, compensation (a) supplementary pension scheme in operation within Thales at the i.e. 2.08% of the fixed salary. date of the Board meeting for Group executives whose compensation exceeds the contributions ceiling set by Agirc, the French executive pension fund. Entitlement to the rights acquired by the Company representative, calculated in points as for the Agirc mechanism, is not subject to the employment condition in the Company at the time of payment of the retirement benefits. This deferred compensation is only deemed to have been acquired on condition that the Company representative has carried out a full term in office. Their entitlement is subject to performance conditions over the last three years. It is increased (doubling the annuity) if the Company representative accumulates a minimum of 10 years’ service on the Executive Committee of Thales. This related-party commitment was approved by the General Meeting of 13 May 2015 (resolution 16). For more details, see paragraph “Deferred incremental and conditional compensation”, page 163. Severance pay (a) Subject to fulfilment of the same performance conditions as for – – deferred incremental and conditional compensation, compensation could be paid to Mr Patrice Caine if his term of office as Company representative were terminated, except in the case of resignation, serious misconduct or gross negligence. The amount of compensation is fixed at 12 months of his reference salary (fixed and variable compensation paid over the last 12 months of activity, excluding long- term compensation). This related-party commitment was approved by the General Meeting of 13 May 2015 (resolution 14). For more information, please see the paragraph “Benefits and rights upon the termination of office of the Company representative”, page 163. Private Mr Patrice Caine is entitled to private unemployment insurance – 2017 employer’s unemployment subject to fulfilment of the same performance conditions as those contribution: insurance (c) envisaged for severance pay. €12,356 This related-party commitment was approved by the General Meeting of 13 May 2015 (resolution 15). For more information, please see the paragraph “Benefits and rights upon the termination 3 of office of the Company representative”, page 163. Attendance fees By decision of the Board of Directors on 27 /02 / 2017, Mr Patrice Caine – – does not receive attendance fees, which are retained by the Company. Benefits Mr Patrice Caine is entitled to: of any kind • the services of a chauffeur- driven car for his business travel; €3,987 • external legal and tax assistance. €34,545 In addition, he is entitled to the private healthcare scheme for French employees, an annual check-up like other Thales senior executives and directors’ liability insurance, including criminal liability (b).

(a) Related- party commitment (Articles L. 225- 42- 1 and R. 225- 34- 1 of the French Commercial Code). (b) The cost of healthcare and annual check- up benefits to the Company for financial year 2017 amounted to €3,868. Liability insurance is a collective insurance, the cost of which cannot be individualized.

[© Agence Marc Praquin] 2017 Registration Document — THALES 159 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

Components of 2017 compensation component of directors’ compensation will be duly reduced in order to for other company representatives remain within the annual budget approved by the shareholders. For 2017, the fixed component was thus reduced from €14,000 to Attendance fees €13,490 for the full year. The total amount of attendance fees to be divided among directors and Non- voting members receive €2,500 per Board meeting, i.e., the non-voting members for services to the Board, including compensation same variable compensation as directors, but excluding any fixed payable to directors who are Committee members in respect of their compensation. There have been no non- voting members on Thales’s participation in these Committees is set at €600,000 per year, an Board of Directors since 18 May 2009. amount that has remained unchanged since 2008. The Board decided that directors would receive: For 2017, attendance fees totalled €599,885 (gross amount before any deduction at source and levy) (€595,732 for 2016). This includes for services to the Board, fixed compensation of €14,000 per year • attendance fees not received by the Chairman and CEO and retained (prorated in the event of appointment or resignation during the year), by the Company. The payment of these attendance fees was made in subject to the maximum ceiling on variable compensation, and full in February 2018. Out of the total of €558,145 actually paid, the variable compensation based on attendance at meetings amounting variable part formed the majority, as recommended by the French to €2,500 per meeting; AFEP-MEDEF code, amounting to €364,000 (approximately 65% of • for services to the Committees, compensation (entirely variable), the total received). based on attendance fees of €1,250 per meeting, with the For information purposes, the gross amount (before any deduction at chairman of each Committee receiving an additional €2,000 per source or levy) paid during financial year 2017 (after any retention by year (prorated based on the number of meetings chaired, if the Company) and representing the balance of attendance fees due for applicable). financial year 2016, amounted to €305,132. If, on account of the high number of meetings (variable compensation The tables from the appendices of the AFEP-MEDEF code relating to being paid first), the total amount of €600,000 per financial year executive compensation (Table 2 – Company representative and (gross amount before any deductions) is likely to be exceeded, the fixed Table 3 – Directors) give details of names (see page 161).

• COMPLIANCE WITH THE RECOMMENDATIONS OF THE AFEP-MEDEF CODE

Recommendations of the AFEP- MEDEF code Thales provisions for Mr Patrice Caine, Company representative since 23 December 2014

Severance pay Only in the event of forced departure Yes Performance conditions over two years Performance conditions over the last three financial years Maximum amount: two years’ compensation (fixed and variable) 12 months of his reference salary (fixed and variable compensation paid over the last 12 months of activity, excluding long- term compensation).

Supplementary pension Not applicable (a)

(a) The deferred incremental and conditional compensation of Thales’ Company representative is an arrangement that is modelled on pension schemes, but which is not governed by Article L. 137.11 of the French Social Security code or Article 24.2.6 of the AFEP-MEDEF Corporate Governance Code. This benefit is not subject to the condition of the recipient serving out the rest of his /her career with the Company. Under this arrangement Thales awards, under conditions relating to seniority in office and performance, deferred compensation paid as an annuity when the beneficiary claims their mandatory pension. The calculation procedures for this deferred compensation, and the corresponding amounts, comply with the principles relating to the compensation of directors as defined by Article 24- 1 of the AFEP- MEDEF Corporate Governance Code.

• TABLE 1: COMPENSATION, OPTIONS AND SHARES GRANTED TO THE COMPANY REPRESENTATIVE

(in € thousand) 2017 2016

Patrice Caine, Chairman and CEO since 23 December 2014 Compensation due for the year (detailed in Table 2) 1,505.5 1,090.2 Value of stock options granted during the financial year – – Value of performance shares granted during the financial year – – Value of performance units granted during the financial year 449 – TOTAL 1,954.5 1,090.2

160 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

• TABLE 2: COMPENSATION OF THE COMPANY REPRESENTATIVE

(in € thousand) 2017 2016

Due for the Paid during the Due for the Paid during the financial year financial year financial year financial year Patrice Caine, Chairman and CEO Fixed compensation 700.0 700.0 450.0 449.2 Variable compensation (a) 805.5 599.9 599.9 518.3 Exceptional compensation – – – – Attendance fees (b) – – – 2.7 Benefits in kind (c) 38.5 38.5 40.3 40.3 Total Patrice Caine 1,543.5 1,338.4 1,090.2 1,007.8

(a) See Section 3.2.2.1 on the review of variable compensation for 2017. (b) Does not receive any fees that would be granted due to his participation in meetings of the Board of Directors and the Strategic & CSR Committee. These are retained by the Company (decision of the Board of Directors on 27 February 2017). The amount of fees calculated and not paid to Mr Patrice Caine in 2017 following this decision is €24,350. (c) The Company representative is entitled to the services of a chauffeur- driven car, and independent tax and legal advice.

• TABLE 3: ATTENDANCE FEES AND OTHER COMPENSATION RECEIVED BY NON-EXECUTIVE DIRECTORS IN 2017 AND 2016 (GROSS AMOUNTS BEFORE ANY DEDUCTION AT SOURCE OR OTHER LEVY)

Beneficiary (gross amount in euros) Paid in 2017 (a) Paid in 2016 Notes

Th. Aulagnon (up to 23 August 20 16 incl.) 10,101 32,242 (b) L. Broseta 17,350 30,750 Y. d’Escatha 25,600 42,750 G. Dyevre 17,350 24,362 Ch. Edelstenne 22,350 42,000 D. Gény- Stephann (from 29 November 20 16 incl.) 888 (b) Ph. Lépinay 22,350 42,000 H. Proglio (up to 12 May 20 15 incl.) 3,888 L. Segalen 22,350 42,000 A.- C. Taittinger 24,350 44,000 A. Taylor 19,850 33,250 E. Trappier 23,600 38,250 3 M.- F. Walbaum 17,350 33,250 Inter CFDT (D. Floch up to 8 December 20 16 incl. + M. Saunier up to 12 October 2016 incl.) 39,455 85,250 (b) Inter CFE- CGC (A.- M. Hunot- Schmit from 09 December 2016 incl.) 619 (b) FGMM- CFDT (F. Sainct from 9 December 20 16 incl.) 619 (b) Treasury Accountant – Art. 139 NRE (L. Collet- Billon + M. Vial) 40,950 88,051 TOTAL GROSS AMOUNT OF ATTENDANCE FEES PAID 305,132 582,043 (C) Company representative – – (d)

(a) From a decision of the Board of Directors on 27 February 2017, attendance fees are paid annually. The payments made in 2017 correspond to the sum of the fixed portion of attendance fees due for financial year 2016 and the variable portion of attendance fees due for the second half of 2016 only. (b) These amounts are determined proportionate to time spent for the appropriate period. (c) Above are gross amounts paid in 2016 and 2017. The gross amount of attendance fees due for these two years (including attendance fees not received by the Company representative and retained by the Company) are €599,885 and €595,732 respectively, less than the annual budget of €600,000 authorized by the General Meeting. (d) By decision of the Board, Mr Patrice Caine has not received attendance fees since February 2015. These fees are retained by the Company. The amount of fees calculated and not paid to Mr Patrice Caine as a result of this decision was €44,000 for financial year 2016 and €24,350 for financial year 2017. This is noted in Table 2 (summary of compensation paid to the Company representative).

• TABLE 4: SUBSCRIPTION OR PURCHASE OPTIONS AWARDED DURING THE FINANCIAL YEAR TO THE COMPANY REPRESENTATIVE BY THE ISSUER OR BY ANY OTHER GROUP COMPANY None. The Company has not awarded subscription or purchase options since 2012.

• TABLE 5: SUBSCRIPTION OR PURCHASE OPTIONS EXERCISED DURING THE FINANCIAL YEAR BY THE COMPANY REPRESENTATIVE None.

2017 Registration Document — THALES 161 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

• TABLE 6: PERFORMANCE SHARES AWARDED DURING THE FINANCIAL YEAR TO THE COMPANY REPRESENTATIVE During financial year 2017, no performance shares were awarded to Mr Patrice Caine. In the context of the 2017 compensation policy approved by the General Meeting of 18 May 2017 in its seventh resolution, he was awarded a long- term incentive plan in the form of performance units, the main conditions of which are shown below.

Director’s name Date of plan Maximum number Vesting conditions of performance units

Patrice Caine 27/02/2017 5,000 Shares vested after a four- year vesting period from and 28/09/2017 27 February 2017 and subject to performance conditions

• LONG- TERM INCENTIVE PLAN CRITERIA AND WEIGHTINGS (2017 LTIP)

2017 LTIP criteria Weighting Objectives Threshold Payment as % of target Cumulative free 40% Floor: If results < floor 0% operating cash flow (2,000 €2.4 billion If results = floor (=33% of maximum) 13.20% 2017- 2019 units)

Ceiling: If results >– ceiling for the period 40.00% €3.35 billion Variations between floor and ceiling calculated on a straight- line basis

Average order 40% Floor: If results < floor 0% intake for 2017- 2019 (2,000 €15 billion If results = floor (=50% of maximum) 20.00% units)

Ceiling: If results >– ceiling for the period 40.00% €17 billion Variations between floor and ceiling calculated on a straight- line basis

Total Shareholder Return 10 % Floor: median If TSR < median of the panel 0% compared to a panel (500 of the panel If TSR = median of the panel (=50% of maximum) 5.00% of European companies (a) units) Measure based Ceiling: highest If TSR is in the highest quintile of the panel 10.00% on performance quintile of the panel at 31 / 12 / 2019 Variations between median and entry point

compared to 31/ 12 / 2016 of highest quintile calculated on a straight- line basis

Total Shareholder Return 10% Floor: median If TSR < median of the index 0% compared to the Euro (500 of the Euro Stoxx index If TSR = median of the index (=50% of maximum) 5.00% Stoxx index. units) Measure based on Ceiling: highest If TSR is in the highest quintile of the index 10.00% performance at quintile of the index 31 / 12 / 2019 compared Variations between median and entry point to 31 / 12 / 2016 of highest quintile calculated on a straight- line basis

(a) The panel includes: Airbus, BAE Systems, Dassault Aviation, Leonardo, Gemalto, Rolls-Royce, Safran et Zodiac Aerospace.

• TABLE 7: PERFORMANCE SHARES THAT HAVE BECOME AVAILABLE DURING THE FINANCIAL YEAR FOR THE COMPANY REPRESENTATIVE As indicated in Tables 1 and 6, Mr Caine’s compensation as Company representative does not include performance shares. All performance shares that have become available during the financial year were awarded to him under his previous salaried positions and prior to his appointment as Company representative.

Director’s name Date of plan Number of shares Vesting conditions that have become available during the year

Patrice Caine 15 / 09 /2013 4,891 Shares vested after a four- year vesting period and subject to a performance condition

• TABLE 8: PAST AWARDS OF SUBSCRIPTION OR PURCHASE OPTIONS TO THE COMPANY REPRESENTATIVE None. Mr Caine has not received any subscription or purchase options during his term in office. He has retained those that had been awarded to him with respect to his previous salaried positions.

162 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governances — Corporate governance

• TABLE 9: SUBSCRIPTION OR PURCHASE OPTIONS GRANTED TO THE TOP TEN EMPLOYEES WHO ARE NOT COMPANY REPRESENTATIVES, AND OPTIONS EXERCISED BY THE TEN EMPLOYEES WITH THE HIGHEST NUMBER OF OPTIONS PURCHASED OR SUBSCRIBED DURING 2017

Total number Weighted of options average price Options granted during the year by the issuer and any company within the scope of the grant of options, to the ten employees of the issuer and any company within that scope, having the highest number of options thus granted Nil Nil Options held on the issuer and the companies referred to above and exercised during the financial year by the ten employees of the issuer and of these companies, having the highest number of options thus purchased or subscribed 57,236 €34.96

The Company has not awarded subscription or purchase options since 2012.

• TABLE 10: MULTI-ANNUAL VARIABLE COMPENSATION PAID TO THE COMPANY REPRESENTATIVE None.

• TABLE 11

Company representative Employment Supplementary Indemnifications Indemnifications contract pension or benefits relating to a scheme due or likely non-competition to become due clause as a result of termination or change of position Yes No Yes No Yes No Yes No

Patrice Caine x x (a) x (b) x

(a) See Note (a) to the table “Compliance with the recommendations of the AFEP- MEDEF code”, page 160. (b) Decisions taken in 2015.

Deferred incremental and conditional compensation is only deemed to have been acquired on condition that compensation of Mr Patrice Caine, the Company representative has carried out a full term in office and has company representative drawn their retirement benefits. Their entitlement is also subject to achieving a performance criterion over the last three full financial years: the average Following the decision of the Board of Directors on 25 February 2015, rate of achievement of annual EBIT objectives set by the Board for the the Thales Company representative is entitled to deferred incremental Company representative must be higher than or equal to 80%. compensation, the amount of which is determined using the same points method as for the Group supplementary pension scheme in This mechanism (annuities and social costs of the employer) is 3 operation at the date of the Board meeting for Group executives whose provisioned and financed by the Company. compensation exceeds the contributions ceiling set by Agirc, the French This deferred compensation is increased (doubling the annuity) if the executive pension fund. Company representative accumulates a minimum of 10 years’ service This arrangement is based on defined benefit plans but is not governed on the Executive Committee of Thales. by Article L. 137.11 of the French Social Security Code as its benefit is not In 2017, Mr Patrice Caine potentially acquired annual deferred subject to the recipient serving out the rest of their career with the Company: compensation of €14,554. the acquisition of rights is progressive and is based on capped • At 31/ 12 /2017, the theoretical annual annuity, accumulated since the compensation received during each year. The system draws upon beginning of the term of office, stood at €30,240 (i.e. 4.32% of the the Agirc retirement plan and its points calculation. Acquisition annual fixed salary). relates to the tranche of salary not affected by compulsory schemes, namely salaries higher than 8 annual Social Security caps (Plafonds Benefits and rights upon the termination Annuels de Sécurité Sociale – PASS) ( > €317,856 in 2018); of office of Patrice Caine, company representative the calculation is made each year on the compensation declared to • Severance pay URSSAF and using the annual values of Social Security caps and the official Agirc reference salary. The acquisition base is equal to Following the decision by the Board and in accordance with the 20% of the portion of salary paid between 8 PASS and 32 PASS conditions laid down by the AFEP- MEDEF code, with which the maximum (i.e. between €317,856 and €1,271,424 in 2018), Company has declared that it complies, compensation may be paid to which has the effect of limiting annual acquisition to a maximum of Mr Patrice Caine if his term of office as Company representative should approximately €14,500; be terminated, except in the case of resignation, serious misconduct or gross negligence. • this base is then divided by the Agirc reference salary for the year (acquisition price of one point) to obtain a number of notional points The amount of this severance pay is fixed at 12 months of his reference acquired for the year. The potential compensation to be paid is salary (fixed and variable compensation paid over the last 12 months of equal to the total number of points acquired multiplied by the value activity, excluding the long- term incentive plan). The Chairman and of the Agirc point on the date of setting up the annuity. CEO resigned when he took up office and no longer has an employment contract with the Company. Entitlement to the rights acquired by the Company representative is not subject to the employment condition in the Company at the time of The payment of this compensation is subject to achieving a payment of the retirement benefits. On the other hand, this deferred performance criterion over the last three full financial years: the average

2017 Registration Document — THALES 163 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

rate of achievement of annual EBIT objectives set by the Board for the variable component and a long-term incentive plan (LTIP). The respective Company representative must be higher than or equal to 80%. proportion of each component is determined based on the level of responsibility of each position and on benchmark compensation studies Private unemployment insurance conducted in various national markets where Thales has employees. A decision was also made to take out private unemployment insurance For the Company representative, these components are weighed up based on the same performance criteria as for severance pay. This and determined in the following manner: provides for one year’s compensation for an amount limited to the sum of the amounts corresponding to 70% of the A and B (Social Security) • the fixed component is determined based on the level of tranches of net taxable income and 50% of the C tranche of this same responsibility and on benchmark compensation studies of income. At 31 December 2017, this private unemployment insurance comparable profiles; would have represented private annual compensation equal to • annual target variable compensation is equal to the fixed approximately €199,000, i.e. 28% of the Chairman and CEO’s fixed compensation; in the event that maximum objectives are achieved, it compensation. is capped at 137.5% of fixed compensation; In accordance with current law, the related-party commitments (deferred • the value of the target long- term incentive plan at the grant date may incremental and conditional compensation, severance pay and private not exceed 100% of the fixed compensation. unemployment insurance) on behalf of Mr Patrice Caine were published on the Company’s website five days after the Board of Directors’ Long-term incentive is based on the achievement of demanding meeting on 25 February 2015 at which these decisions were made. performance criteria measured at the end of a three-year period. It vests They were put to the vote at the General Meeting on 13 May 2015 in a single instalment at the end of a four-year period. Most of the following a special report by the statutory auditors. long-term incentive is subject to internal performance criteria linked to strategic objectives laid down by the Board that take into account the objectives communicated to financial markets (if these exist). 3.2.2.2 Compensation The Company representative must hold the Thales shares delivered to of the Chairman them at each LTIP maturity date, at 50% of the net after- tax gain from these LTIPs until they have accumulated the equivalent of one year’s and CEO for 2018 fixed compensation in shares. They must keep these shares for their entire term of office as Company representative. A. Compensation policy for the Chairman The Company representative is also entitled to a deferred incremental and CEO: general framework and conditional compensation mechanism detailed in Section 3.2.2.1. The General Meeting of 18 May 2017 approved a compensation Lastly, the severance payment shall only be paid to the Company structure for the Chairman and CEO with the following components: representative in the event of forced departure, contingent upon the • annual fixed compensation; achievement of performance targets over three financial years. They are • annual variable compensation whose target level is equal to the capped at 12 months of reference salary (fixed and variable fixed compensation, based on a combination of financial and compensation paid over the last 12 months of activity, excluding non- financial criteria, with financial criteria being of overriding LTIP), which is less than the amount recommended under the importance; AFEP- MEDEF code. long-term incentives (Long- term Incentive Plan – LTIP) linked to the • Pursuant to the AFEP-MEDEF code (Section 24.1.2), the rules for value of the Thales share, in the form of performance shares or units; determining the Company representative’s compensation should be severance pay (1); • stable and the performance criteria used should be, to the greatest private unemployment insurance (1); • extent possible, long lasting. As regards fixed compensation, in deferred incremental and conditional compensation (1); • principle this should only be reviewed at relatively long intervals legal and tax advice; • (Section 24.3.1 of the AFEP- MEDEF code). • private healthcare benefits identical to those offered to senior executives; For 2018, the Board wishes, in compliance with the principles of the • directors and officers liability insurance; French AFEP-MEDEF code, to renew the compensation policy for the • reimbursement of business expenses in accordance with Thales’ Chairman and CEO approved by the General Meeting on rules and guidelines; 18 May 2017. an annual medical check- up like other Thales senior executives; • If the planned takeover bid for Gemalto is successful, the Board will the services of a chauffeur- driven car. • examine the opportunity of reviewing the compensation policy of the The Company complies with the AFEP-MEDEF Corporate Governance Chairman and CEO, especially taking into account the change in the Code (Section 24.1), whereby: Group’s size. the Company representative’s compensation should be competitive, • B. Implementation of compensation tailored to the corporate strategy and environment and must be policy for the Chairman and CEO in 2018 intended to boost the Company’s long-term performance and competitiveness. It must be designed to retain and motivate an In accordance with the provisions of Article L. 225-37- 2 of the French effective Company representative; Commercial Code, the Board of Directors must submit the principles and criteria for determining, breaking down and allocating the fixed, • when determining the compensation, the following principles must variable and exceptional items that make up the total compensation be considered: comprehensiveness, balance between different and benefits in kind granted to the chairman, the Chief Executive components of compensation, consistency with the compensation of Officers and Deputy Chief Executive officers, for the approval of the other company executives and employees, understandability of the Annual General Meeting at least once a year. rules (simple, stable and transparent) and balance in terms of the corporate interest, market practices, the performance of the Company This section sets out the draft resolution for 2018 (No 19) concerning the representative and the views of other stakeholders. compensation payable to the Chairman and CEO, the Company’s only Company representative. The compensation of Executive Committee members and most of the Group’s senior executives is made up of a fixed component, an annual

(1) Related- party agreements, subject to performance conditions. the renewal of these commitments will be subject to the approval of the general meeting of 23 May 2018.

164 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

If this resolution is adopted by the Annual General Meeting of on the value of the Thales share on the vesting date of the performance 23 May 2018: units. Based on the value of the Thales share at end- 2017, this compensation would correspond to a maximum of approximately the principles and criteria set out in this section will be applicable • €449,400, or 64% of fixed compensation for 2018, if the beginning in 2018, subject to any possible amendment at a maximum objectives are reached. subsequent Annual General Meeting deliberating on the same subject, in accordance with the aforementioned provisions of Article In accordance with Articles L. 225- 37-2 and R. 225- 29-1 of the L. 225- 37- 2; French Commercial Code, the Chairman and CEO’s annual variable compensation in respect of 2018 will only be paid further to approval the components of total compensation and benefits in kind paid or • by the Annual General Meeting to be held in 2019. granted to the Chairman and CEO for 2018 in accordance with these principles and criteria will be put to the vote at the Annual b) Criteria for setting variable compensation for 2018 General Meeting called to approve the financial statements for 2019, in accordance with Articles L. 225-37- 2 and L. 225- 100- II As in previous years, the criteria for determining the variable of the French Commercial Code which stipulate inter alia that compensation are set at an overall level of 75% financial and 25% payment of variable and exceptional items are subject to the non-financial. In order to reward over- performance of the financial approval of the Annual General Meeting. criteria, the amount of the payment relative to these criteria may exceed the target up to 150%. This is not the case for the non-financial portion At its meeting on 5 March 2018, the Board of Directors, on the which is capped at 100%. Consequently, annual variable compensation recommendation of the Governance & Remuneration Committee, is capped at 137.5% of the target. decided to keep the structure and level of compensation payable to the Chairman and CEO for 2018 unchanged. (i) Financial criteria for 2018 The Board of Directors has decided to keep financial criteria and a) Structure of overall compensation for 2018 weightings identical to those prevailing in the calculation of the 2017 The Board of Directors has decided to: variable compensation, namely: • keep the annual fixed compensation at €700,000; • 35% based on EBIT; • 20% based on order intake; • keep the annual target variable compensation at 100% of annual • 20% based on free operating cash flow. fixed compensation, capped at 137.5% of the target, i.e. €962,500 if targets are exceeded; For each criterion, annual variable compensation will only be paid if a demanding threshold is reached. For the first two criteria (EBIT and keep the amount of the Long-Term Incentive Plan (LTIP), which will • order intake), no amount is due when the actual figure reported is less comprise a maximum of 5,000 performance units, each tied to the than or equal to 90% of the target. For free operating cash flow, no value of the Thales share at the closing price on 4 March 2022. amount is due when the actual figure reported is below the budgeted The exact amount of this compensation will depend on the objective by more than 2% of targeted budgeted revenue. achievement of performance and attendance conditions, as well as

Triggering ranges for each of the financial criteria are detailed below:

Financial criteria for annual Weighting Threshold Payment as % of target variable compensation

EBIT 35% If results <– 90% of budgeted objective 0% 3 If results = 100% of budgeted objective 35.00%

If results >– 110% of budgeted objective 52.50% Order intake 20% If results <– 90% of budgeted objective 0% If results = 100% of budgeted objective 20.00%

If results >– 110% of budgeted objective 30.00% Free operating cash flow 20% If results <– budgeted objective – 2% of budgeted revenues 0% If results = 100% of budgeted objective 20.00%

If results >– budgeted objective + 2% of budgeted revenues 30.00% TOTAL FINANCIAL CRITERIA 75%

The definition and calculation of these criteria are set out in Section 1.1.1.2. • Five-years strategic priorities: definition of profitable growth objectives for the coming years and organization of the next The Board may adjust the objectives in the event that the takeover bid “Capital Markets Day”; for Gemalto is successful and Gemalto is consolidated before the end Globalization: Implementation of new initiatives to pursue the Group’s of the year. The Board will report on this at the 2019 Annual General • global development strategy, focused on selected major countries ; Meeting. • Corporate Social Responsibility: Continued deployment of actions For reasons of confidentiality, the exact objectives underlying these financial relating to diversity and inclusion within Thales at all levels of criteria, determined by the Board and tied to the approved annual budget, companies – Definition of new three- year environmental objectives – cannot be disclosed. The level of achievement for each financial criterion Re-launch of a global training program for the executives and staff will be detailed a posteriori in the 2018 Registration Document. most exposed to the risks of corruption and influence peddling; Digital strategy/ Gemalto: demonstrate the initial impacts of the (ii) Non- financial criteria for 2018 • Digital Factory to “digitalize” Group activities. Execution of the planned For 2018, the Board has decided to retain four non-financial objectives, takeover of Gemalto. each representing a quarter of the 25% allocated to the non-financial portion:

2017 Registration Document — THALES 165 Corporate governance — Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance

c) 2018 Long-Term Incentive Plan (LTIP) (i) 2018 LTIP performance criteria The LTIP is designed to reward the Chairman and CEO for the Group’s The Board of Directors has decided to apply demanding performance long- term performance. criteria tied to the Group’s key levers of long- term value creation and their implementation as part of the “Ambition 10” strategic vision Its structure and size for 2018 are unchanged compared with the focused on growth and competitiveness. Therefore, performance is programme implemented in 2017. measured as follows over this three- year period: It therefore consists of performance units tied to the value of the Thales 40% based on a growth objective measured in terms of average share. The units will be paid at 50% in Thales shares and at 50% in • order intake over the 2018- 2020 period; cash. The grant approved by the Board consists of a maximum of 5,000 performance units, comprising the number of units that may • 40% based on a competitiveness objective measured in terms of ultimately vest in the event that related maximum objectives are reached cumulative free operating cash flow over the 2018- 2020 period; and vis- à- vis the criteria listed below. • 20% based on Thales’ stock market performance and measured by These performance units are subject to a vesting period of four years Total Shareholder Return or TSR (which includes reinvested from 5 March 2018. The performance units that actually vest in 2022 dividends). Half of this stock market performance weighting (10%) is will depend on the achievement of performance conditions measured based on a comparison with a panel of European companies in over a three- year period (2018- 2020). comparable sectors of activity (which includes the following eight equally weighted companies: Airbus, Atos, BAE Systems, Pursuant to Articles L. 225-37- 2 and R. 225-29- 1 of the French Capgemini, Dassault Aviation, Leonardo, Rolls-Royce, Safran) and Commercial Code, the related payments will be submitted to the vote the other half (10%) with the Euro Stoxx index. The calculation is of the Shareholders’ Meeting in accordance with legal conditions. based on a comparison of performance at 31 December 2020 with performance at 31 December 2017.

The following thresholds are applied:

• WEIGHTING OF THE 5,000 2018 LTIP PERFORMANCE UNITS

2018 LTIP criteria Weighting Objectives Threshold Payment as % of target Cumulative free 40% Floor: If results < floor 0% operating cash flow (2,000 €2.6 billion If results = floor (=33% of maximum) 13.20% 2018- 2020 units)

Ceiling: If results >– ceiling for the period 40.00% €3.6 billion Variations between floor and ceiling calculated on a straight- line basis

Average order intake 40% Floor: If results < floor 0% for 2018- 2020 (2,000 €15.5 billion If results = floor (=50% of maximum) 20.00% units)

Ceiling: If results >– ceiling for the period 40.00% €17.5 billion Variations between floor and ceiling calculated on a straight- line basis

Total Shareholder Return 10% Floor: median If TSR < median of the panel 0% compared to a panel of (500 of the panel If TSR = median of the panel (=50% of maximum) 5.00% European companies (a) units) Measure based Ceiling: highest quintile If TSR is in the highest quintile of the panel 10.00% on performance at of the panel 31 / 12 / 2020 compared Variations between median and entry point to 31 / 12 / 2017 of highest quintile calculated on a straight- line basis

Total Shareholder Return 10% Floor: median of the If TSR < median of the index 0% compared to the Euro (500 Euro Stoxx index If TSR = median of the index (=50% of maximum) 5.00% Stoxx index units) Measure based on Ceiling: highest If TSR is in the highest quintile of the index 10.00% performance at quintile of the index 31 / 12 / 2020 compared Variations between median and entry point to 31 / 12 / 2017 of highest quintile calculated on a straight- line basis

(a) The panel includes: Airbus, Atos, BAE Systems, Capgemini, Dassault Aviation, Leonardo, Rolls- Royce and Safran.

166 THALES — 2017 Registration Document Report of the Board of Directors to the General Meeting of 23 May 2018 on corporate governance — Corporate governance

The Board may adjust the objectives in the event of the planned d) Other items of the Chairman and CEO’s compensation takeover bid for Gemalto being successful. The Board will report on this The Chairman and CEO is entitled to three other items of compensation at the 2019 Annual General Meeting. subject to related- party commitments: After the end of the 2020 financial year, the Board of Directors will • severance pay; disclose the number of performance units that actually vest following a • private unemployment insurance; review of the achievement of the performance conditions. • deferred incremental and conditional compensation. (ii) Additional 2018 LTIP vesting criteria These three items of compensation, described in Section 3.2.2.1, were Payment of the performance units is subject to the Chairman and CEO put in place in February 2015 for the benefit of the Company still being with the Company at the end of the four- year vesting period. representative after his employment contract with the Group was ended. If he should leave the Group during the vesting period, all performance They were again authorized by the Board of Directors on unit entitlements shall be forfeited. Entitlement shall only be maintained 5 March 2018 and then published on Company’s website. They are in the event of death, disability or retirement. The value of each vested subject to the vote of the General Meeting of 23 May 2018, as performance unit will correspond to the value of the Thales share at the related-party commitments, in view of the renewal of the Chairman and close of trading on 4 March 2022, the last published price before the CEO’s term of office. performance units are vested to the grantee. The Chairman and CEO is also entitled to other items of compensation The Chairman and CEO must hold the Thales shares delivered to him at as follows: 50% of the net after- tax gain from the LTIP, until he has accumulated a portfolio of shares equivalent to one year’s fixed salary, and hold onto • legal and tax advice; these shares for his entire term of office as Company representative. • private healthcare benefits identical to those offered to senior executives; • directors and officers liability insurance; In accordance with Section 24.3.3 of the AFEP-MEDEF Corporate • reimbursement of business expenses in accordance with Thales’s Governance Code and the Internal Code on Insider Trading, the rules and guidelines; Chairman and CEO has undertaken not to use any hedging instruments in • an annual medical check- up like other Thales senior executives; relation to his risk exposure on any shares or performance units he holds. • the services of a chauffeur- driven car. The Board of Directors has also confirmed that the Chairman and CEO does not receive attendance fees in his capacity as director. For more information, please refer to Section 3.2.2.1.

3

2017 Registration Document — THALES 167 Corporate governance — Corporate management and executive committee

3.3 CORPORATE MANAGEMENT AND EXECUTIVE COMMITTEE

Executive Committee at 31 December 2017

Marc Darmon Alex Cresswell Philippe Duhamel Gil Michielin Jean-Loïc Galle Millar Crawford Executive Vice Executive Vice Executive Vice Executive Vice Executive Vice Executive Vice President, Secure President, President, Defence President, Avionics President, Space President, Ground Communications and Land & Air Systems Mission Systems Transportation Information Systems Systems

Patrice Caine Chairman and CEO

Pierre-Éric Pascale Sourisse David Tournadre Pascal Bouchiat Isabelle Simon Philippe Keryer Pommellet Senior Executive Senior Executive Senior Executive Company Secretary Executive Senior Executive Vice Vice President, Vice President, Vice President, Vice President, President, Operations International Human Resources Finance and Strategy, Research & Performance Development Information Systems and Technology

168 THALES — 2017 Registration Document Compensation of other executives — Corporate governance

3.4 COMPENSATION OF OTHER EXECUTIVES

3.4.1 Compensation of other Group executives

Total compensation paid in 2017 to Executive Committee members compensation for 2016. As is the case for the Chairman and CEO, (proportionate to the time spent on the Committee) excluding the the variable component is based on financial and non-financial Chairman and CEO, was €8,551k, including 41% in variable performance criteria.

• DETAILS OF COMPENSATION PAID TO THE EXECUTIVE COMMITTEE (EXCLUDING THE CHAIRMAN AND CEO) IN 2016 AND 2017

(in € thousand) 2017 2016

Paid during the Paid during the financial year financial year Executive Committee (excl. Chairman and CEO) Fixed compensation 4,489 4,298 Variable compensation 3,528 3,182 Payments due upon retirement 502 – Benefits in kind 32 29 Total before social contributions 8,551 7,509 Employer social contributions 2,690 2,433 TOTAL EXPENSE 11,241 9,942

In addition, at the end of December 2017, the members of the the characteristics, as well as any options exercised, are shown in the Executive Committee, other than the chairman, together had a total of tables on pages 183 and 184 with the summary of transactions carried 7,252 stock options, 65,070 performance shares, 91,500 performance out by directors, non-voting directors and related persons (Section units and 11,200 phantom shares. The breakdown by grant date and 4.2.3.7).

3.4.2 Share- based compensation

Description of the different plans granted Outstanding options at 31 December 2017 by the Group At 31 December 2017, the following options, shares and units were The Group regularly grants its employees and executives share outstanding: 3 subscription options, share purchase options (until 2011) and /or free 850 share purchase options at a weighted average exercise price shares (since 2007), as part of its standard performance management • of €38.50; policy for Group employees. These different plans are described 783,204 stock subscription options at a weighted average exercise below: • price of €34.13, of which 155,427 are subject to performance conditions.

2017 Registration Document — THALES 169 Corporate governance — Compensation of other executives

• OUTSTANDING SHARE PURCHASE OPTIONS

Date of Board decision 25 /11 / 2008 04 /07 / 2007

Discount at grant Nil Nil Performance conditions No No Exercise period from 25 /11 / 2012 from 04 /07 / 2011 to 24 /11 / 2018 to 03 / 07 /2017 Exercise price €38.50 €44.77 NUMBER OF OPTIONS OUTSTANDING AT 31 / 12 / 2017, NET OF OPTIONS CANCELLED (a) AND EXERCISED 850 – Of which exercisable options at 31 / 12 /2017 850 – Of which outstanding options at 31 /12 / 2017 held by: • the Chairman and CEO, Patrice Caine – – • the other members of the Executive Committee – – NUMBER OF BENEFICIARIES OF OUTSTANDING OPTIONS 1 – Of which members of the Executive Committee (excluding the Chairman) at 31 / 12 /2017 – – Total grant to top ten beneficiaries (at plan date) 73,200 –

(a) Notably due to termination of the employment contract between the beneficiary and the Group since the grant date.

• SHARE SUBSCRIPTION OPTIONS

Date of Board decision 15 / 09 /2011 23 / 09 /2010 25 / 06 / 2009 01 /07 / 2008

Discount at grant Nil Nil Nil Nil Performance conditions Yes Yes No No Exercise period (a) from 15 /09 / 2015 from 23 / 09 /2014 from 25 /06 / 2013 from 01 / 07 / 2012 to 14 /09/ 2021 to 22 / 09 /2020 to 24 /06 / 2019 to 30 /06 / 2018 Exercise price €26.34 €26.34 €32.88 €38.50 NUMBER OF OPTIONS OUTSTANDING AT 31 /12 / 2017, NET OF OPTIONS CANCELLED (b) AND EXERCISED 85,377 70,050 272,752 355,025 Of which exercisable options at 31 /12 / 2017 85,377 70,050 272,752 355,025 Of which outstanding options at 31 / 12 / 2017 held by: • the Chairman and CEO, Patrice Caine (c) 1,538 1,900 – – • the other members of the Executive Committee 2,752 4,500 – – NUMBER OF BENEFICIARIES OF OUTSTANDING OPTIONS 37 28 293 255 Of which members of the Executive Committee (excluding the Chairman) at 31 / 12 / 2017 2 2 – – Total grant to top ten beneficiaries (at plan date) 124,000 161,500 222,000 230,000

(a) Applicable to France for plans awarded prior to 2009 and to all countries since 2010. (b) Primarily because of the termination of the employment contract between the beneficiary and the Group since the grant date or because of cancellation related to partial or complete failure to achieve the performance conditions. (c) Grant prior to his appointment as Chief Executive Officer.

170 THALES — 2017 Registration Document Compensation of other executives — Corporate governance

Date of Board decision 04 / 07 /2007

Discount at grant Nil Performance conditions No Exercise period (a) from 04 / 07 /2011 to 03 /07 / 2017 Exercise price €44.77 NUMBER OF OPTIONS OUTSTANDING AT 31 / 12 / 2017, NET OF OPTIONS CANCELLED (B) AND EXERCISED – Of which exercisable options at 31 / 12 / 2017 – Of which outstanding options at 31 / 12 / 2017 held by: • the Chairman and CEO, Patrice Caine (c) – • the other members of the Executive Committee – NUMBER OF BENEFICIARIES OF OUTSTANDING OPTIONS – Of which members of the Executive Committee (excluding the Chairman) at 31 / 12 / 2017 – Total grant to top ten beneficiaries (at plan date) 240,000

(a) Applicable to France for plans awarded prior to 2009 and to all countries since 2010. (b) Primarily because of the termination of the employment contract between the beneficiary and the Group since the grant date or because of cancellation related to partial or complete failure to achieve the performance conditions. (c) Grant prior to his appointment as Chief Executive Officer.

Conditions of exercise The options granted on 15 September 2011 were contingent upon the achievement of internal performance conditions over the three financial All Thales share purchase and subscription options are granted for a years following their grant date. The three criteria used were EBIT, 10- year period, at no discount to the market price. operating cash flow and order intake, with these criteria having a Share purchase and subscription options granted between 1 July 2008 weighting of 60%, 25% and 15% respectively. and 15 September 2011 can now be exercised in full. The rights were validated in one- third tranches at the Board of Directors’ meetings to close the accounts for the three financial years concerned, resulting in the validation of 80.90% of the options granted.

• VALIDATION OF PERFORMANCE CONDITIONS FOR FINANCIAL YEAR 2017

Option, share, unit and Validation of the 1st third Validation of the 2nd third Validation of the 3rd third phantom share plans subject of the allotment of the allotment of the allotment to performance conditions Reference % achievement Reference % achievement Reference % achievement 3 year of performance year of performance year of performance conditions conditions conditions

16 September 2014 2015 100% 2016 100% 2017 100% 17 September 2015 2016 100% 2017 100% 2018 – 27 October 2016 2017 100% 2018 – 2019 – 28 September 2017 2018 – 2019 – 2020 –

2017 Registration Document — THALES 171 Corporate governance — Incentives and profit-sharing

• OPTIONS GRANTED AND EXERCISED IN 2017

Number of options Exercise Maturity Date of plan granted/ shares subscribed price date or purchased

1 - Directors Options granted in 2017 Nil Patrice Caine Nil

2 - The ten biggest option awards granted to employees Options granted in 2017 Nil

3 - The ten biggest exercises of options by employees (a) Options exercised in 2017 8,000 €32.88 – 25 / 06 / 2009 7,291 €26.34 – 15 / 09 / 2011 7,000 €26.34 – 15 / 09 / 2011 5,945 €26.34 – 15 / 09 / 2011 5,500 €38.50 – 01 / 07 / 2008 5,000 €44.77 – 04 / 07 / 2007 4,800 €38.50 – 01 / 07 / 2008 4,600 €44.77 – 04 / 07 / 2007 4,600 €38.50 – 01 / 07 / 2008 4,500 €44.77 – 04 / 07 / 2007

(a) For all Group companies combined.

3.5 INCENTIVES AND PROFIT- SHARING

3.5.1 Profit- sharing 3.5.2 Incentive scheme

The Group agreement on pooled profit-sharing for the employees of Each company in France may also negotiate an incentive agreement Thales group companies, signed on 23 December 2004 by all trade (accord d’intéressement) on the basis of indicators which represent its unions represented at Group level, resulted in payment in France in key objectives. Under the terms of the Group profit-sharing agreement 2017 for the 2016 financial year of profit-sharing rights totalling €50.8 in France, it is mandatory to comply with the rule which sets an upper million. This agreement illustrates solidarity among Group companies, limit on the amount of the premium (total incentives + profit share) in since all employees benefit from the same agreement and from a single relation to payroll. profit-sharing fund distributed on the basis of common criteria. 22 French Group companies paid incentives in 2017 for financial year 2016 totalling €38.5 million.

• GROSS AMOUNTS PAID OUT IN INCENTIVES AND PROFIT-SHARING IN RECENT YEARS

(in € millions) 2017 2016 2015 2014 2013 2012

In the Group in France Profit share paid 50.8 34.87 18.70 15.34 22.56 24.29 Incentives paid 38.5 45.22 57.03 43.45 42.38 45.15

By Thales (parent company) Incentives paid 3.96 4.12 4.30 4.12 3.83 4.80

172 Statutory auditors — Corporate governance

3.6 STATUTORY AUDITORS

For the period covered by the historical financial data, the Thales group statutory auditors were as follows:

3.6.1 Principal statutory 3.6.2 Additional statutory auditors auditors

Mazars Hervé Hélias 61, rue Henri Regnault 61, rue Henri Regnault 92400 Courbevoie – France 92400 Courbevoie – France Represented by Mr Jean-Marc Deslandes and Ms Anne-Laure Rousselou. Current term approved by the General Meeting of 24 May 2013 and Current term approved by the General Meeting of 24 May 2013 and expiring with the audit of the 2018 financial statements. expiring with the audit of the 2018 financial statements. Auditex Ernst & Young Audit 1 / 2, place des Saisons 1 / 2, place des Saisons 92400 Courbevoie – Paris- La Défense 1 – France 92400 Courbevoie – Paris- La Défense 1 – France Current term approved by the General Meeting of 13 May 2015 and Represented by Mr Serge Pottiez and Mr Philippe Diu. expiring with the audit of the 2020 financial statements. Current term approved by the General Meeting of 13 May 2015 and expiring with the audit of the 2020 financial statements.

3.6.3 Statutory auditors’ fees

The fees paid to auditors in 2016 and 2017 are presented in the table below (a):

(in € thousand) Mazars Ernst & Young Audit Total

2017 2016 2017 2016 2017 2016

Audit of the financial statements 6,221 5,427 5,052 4,627 11,273 10,054 • Issuer 927 779 920 856 1,847 1,635 • Subsidiaries 5,294 4,648 4,132 3,771 9,426 8,419 Other services 690 526 1,030 791 1,720 1,317 • Issuer 197 190 193 31 390 221 3 • Subsidiaries 493 336 837 760 1,330 1,096 TOTAL 6,911 5,953 6,082 5,418 12,993 11,371

(a) With regard to the period under consideration, these are services performed in respect of a financial year charged to the Income Statement.

2017 Registration Document — THALES 173 COMPANY AND SHARE CAPITAL 4

174 THALES — 2017 Registration Document 4.1 GENERAL INFORMATION ABOUT THE COMPANY 176

4.2 SHARE CAPITAL AND SHAREHOLDERS 177

4.2.1 Information on the distribution of capital issued 177 4.2.2 Potential capital 179 4.2.3 Shareholders 179

4.3 RELATED- PARTY AGREEMENTS 189 4.3.1 Commitments and agreements authorised after year end 189 4 4.3.2 Commitments and agreements authorised during 2017 189 4.3.3 Agreements authorised during previous financial years 190 4.3.4 Statutory auditors’ special report on related- party agreements and commitments 191

4.4 STOCK MARKET INFORMATION AND FINANCIAL COMMUNICATION 193

4.4.1 Thales shares 193 4.4.2 Financial communication policy 196 4.4.3 Other market securities at 31 December 2018 197

2017 Registration Document — THALES 175 Company and share capital — General information about the company

4.1 GENERAL INFORMATION ABOUT THE COMPANY

Company name Financial year

Thales The Company’s financial year covers a period of 12 calendar months from 1 January to 31 December. Corporate documents and information about the Company can be Legal structure consulted at the Group Secretary and General Counsel’s office at the Company’s registered office. Thales is a public limited company with a Board of Directors. It is governed by French law, particularly the French Commercial Code and certain provisions of the amended law on privatisation of Distribution of profits as per 6 August 1986, since the French State owns more than 20% of the share capital. the articles of association

Profits are distributed in compliance with current legislation. Under the Registered office Articles of Association, the Annual General Meeting called to approve the financial statements for the previous financial year is empowered to grant each shareholder the option to receive payment of all or part of Tour Carpe Diem – Place des Corolles – Esplanade Nord – 92400 the dividend distributed either in cash or in shares. Courbevoie – France. Telephone: +33 (0)1 57 77 80 00.

Registration Notifications concerning the crossing of statutory thresholds No. 552 059 024 in the Nanterre Register of Trade and Companies; APE business identifier code: 7010 Z. Any natural person or legal entity owning a number of shares equal to or exceeding 1% of the share capital (but not voting rights), or any multiple thereof, is required to inform the Company of the total number Term of shares held within five trading days of the date on which this threshold is exceeded. Initially incorporated on 11 February 1918 for 99 years, the Company’s This obligation to inform the Company applies, under the same term was extended by the Annual General Meeting of 24 May 2013. conditions, when the number of shares held falls below one of the The expiry date is now set at 23 May 2112. thresholds mentioned in the previous paragraph. In the event of failure to comply with this obligation, the shareholder shall be deprived of the voting rights attached to any shares exceeding Corporate purpose the first undeclared threshold, subject to the conditions and limitations defined by law. The corporate purpose is, directly or indirectly, in all countries: As part of its regulated information, every month, the Company 1. the design, construction, installation, maintenance, operation, publishes on its website the number of shares comprising the capital manufacture, purchase, sale, exchange, supply or hire of all and the total number of voting rights attached – based on all threshold equipment, tools, stations, appliances, finished or semi- finished excesses (statutory and legal). products, materials, substances, components, systems, devices, processes and, in general, all products relating to electronic applications in any field. Annual General Meeting: For this purpose, the registration, purchase, sale, exchange, supply, notice of meetings and concession or use of all business and manufacturing patents, licences and trademarks; conditions for attendance, 2. the research, obtaining, acquisition, disposal, exchange, supply, double voting rights and hire or use of all concessions or undertakings, whether private or exercise of voting rights public, training of staff, and the provision of all services pertaining thereto; The information regarding these sections can be found in the Corporate 3. the formation of any company or association, or investment in any Governance report, Section 3.2.1.6. form whatsoever in any company or undertaking, having a similar or related purpose to that of the Company; 4. and in general, all commercial, industrial, financial and movable or immovable property transactions that relate directly or indirectly to the aforementioned activities.

176 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

4.2 SHARE CAPITAL AND SHAREHOLDERS

4.2.1 Information on the distribution of capital issued

At 31 December 2017, the share capital stood at €636,976,175, Shares in the Company may be held in either registered or bearer form, divided into 212,658,725 shares with a par value of €3 each. at the shareholder’s discretion. The share register is kept on behalf of the Company by Société Générale (Securities Services – 32, rue du Pursuant to the applicable regulations, each month the Company Champ- de- Tir – BP 81236 – 44312 Nantes CEDEX – France). publishes on its website (www.thalesgroup.com), under “Investor / Publications /Regulated Information”, the information pertaining The share capital is fully paid up. It includes a golden share resulting to the total number of voting rights (theoretical and exercisable) and the from the conversion of an ordinary share belonging to the French State, number of shares making up the share capital, and forwards this as decided by decree No. 97- 190 of 4 March 1997, implementing information to the news distribution service. the law on privatisation of 6 August 1986 (see page 182). Changes in share capital and shareholders’ rights are governed by the applicable laws.

4.2.1.1 Changes in the share capital over the last five financial years

Date Type of Acquisition, Number Nominal Amount of Aggregate transaction issue and merger of shares amount of share capital number of premiums created the changes shares in capital making up the capital

31 December 2012 3,731,620,794 607,019,022 202,339,674 Financial year 2013 Exercise of stock subscription options 94,942,634 3,404,826 10,214,478 31 December 2013 3,826,563,428 617,233,500 205,744,500 Financial year 2014 Exercise of stock subscription options 63,313,408 2,096,611 6,289,833 31 December 2014 3,889,876,836 623,523,333 207,841,111 Financial year 2015 Exercise of stock subscription options 105,567,702 3,120,293 9,360,879 31 December 2015 3,995,444,538 632,884,212 210,961,404 Financial year 2016 Exercise of stock subscription options 41,484,459 1,233,362 3,700,086 31 December 2016 4,036,928,997 636,584,298 212,194,766 Financial year 2017 Exercise of stock subscription options 16,276,572 463,959 1,391,877 31 DECEMBER 2017 4,053,205,569 637,976,175 212,658,725

4

2017 Registration Document — THALES 177 Company and share capital — Share capital and shareholders

4.2.1.2 Changes in the distribution of capital and voting rights over the last three financial years

At 31 December 2017, the total number of exercisable voting rights As previously mentioned, the number of shares and voting rights was 306,516,976. This includes double voting rights attached to (theoretical and exercisable) is published monthly on the Company’s shares that have been registered for at least two years under the website (www.thalesgroup.com, under “Investor/ Publications / Regulated conditions set out in the Articles of Association (see Section 3.2.1.6. information”).

31 December 2017 31 December 2016 31 December 2015

Number % of % of Number % of % of Number % of % of of shares share voting of shares share voting of shares share voting capital rights capital rights capital rights

TSA (a) 54,786,654 25.76% 35.75% 54,786,654 25.82% 35.86% 54,786,654 25.97% 36.04% French State (including 1 golden share) 2,060 – – 2,060 – – 2,060 – – Public Sector (a) 54,788,714 25.76% 35.75% 54,788,714 25.82% 35.86% 54,788,714 25.97% 36.04% Dassault Aviation (b) 52,531,431 24.70% 28.44% 52,531,431 24.76% 28.53% 52,531,431 24.90% 28.67% Thales 568,739 0.27% – 749,559 0.35% – 839,254 0.40% – Employees 6,181,444 2.91% 3.50% 5,743,081 2.71% 3.31% 5,684,120 2.69% 3.24% Other shareholders 98,588,397 46.36% 32.31% 98,381,981 46.36% 32.30% 97,117,885 46.04% 32.05% TOTAL 212,658,725 100% 100% 212,194,766 100% 100% 210,961,404 100% 100%

(a) Under the terms of the shareholders’ agreement with Dassault Aviation (the “Industrial Partner”, see AMF 27-11- 2008), the “Public Sector” is represented by TSA, excluding the State directly. All Thales shares held directly and indirectly by the French State have been in directly registered form for more than two years and thus have a double voting right on 31 December 2017. (b) As at 31 December 2017, Dassault Aviation held 42,154,349 shares in directly registered form, including 34,654,349 for more than two years, thus granting it double voting rights, and also held 10,377,082 shares in bearer form.

4.2.1.3 Major changes in share ownership over the last five years

The Company’s treasury shares held totalled 1.38% of the capital at During 2016, the number of treasury shares was reduced due to the 31 December 2012. following transactions: During 2013, the number of treasury shares was reduced due to the • 575,000 shares were purchased on the market; following transactions: • 513,001 shares were purchased under a liquidity contract; • 472,001 shares were sold under a liquidity contract; • 524,861 shares were purchased on the market; • 607,381 shares were assigned as free shares; • 1,582,469 shares were purchased under a liquidity contract; • 56,600 shares were assigned under an allocation of stock options; • 1,624,034 shares were sold under a liquidity contract; • 41,714 shares were sold to employees as part of the 2015 306,130 shares were assigned as free shares; • employee shareholding scheme. • 8,900 shares were assigned under an allocation of stock options; • 473,653 shares were sold to employees as part of the 2013 Treasury shares thus amounted to 0.35% of the capital, i.e., 749,559 employee shareholding scheme. shares, at 31 December 2016. Treasury shares thus amounted to 1.21% of the capital, i.e., 2,490,177 During 2017, the number of treasury shares was reduced due to the shares, at 31 December 2013. following transactions: During 2014, the number of treasury shares was reduced due to the • 852,000 shares were purchased on the market; following transactions: • 819,512 shares were purchased under a liquidity contract; • 743,512 shares were sold under a liquidity contract; • 2,146,816 shares were purchased under a liquidity contract; • 606,653 shares were assigned as free shares; • 2,216,116 shares were sold under a liquidity contract; • 40,000 shares were assigned under an allocation of stock options. • 544,145 shares were assigned as free shares. Treasury shares thus amounted to 0.9% of the capital, i.e., 1,876,732 shares, at 31 December 2014. During 2015, the number of treasury shares was reduced due to the following transactions: • 807,144 shares were purchased under a liquidity contract; • 822,144 shares were sold under a liquidity contract; • 535,532 shares were assigned as free shares; • 29,350 shares were assigned under an allocation of stock options; • 457,596 shares were sold to employees as part of the 2015 employee shareholding scheme. Treasury shares thus amounted to 0.4% of the capital, i.e., 839,254 shares, at 31 December 2015.

178 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

4.2.2 Potential capital

4.2.2.1 Maximum potential capital at 31 December 2017

In number of shares with par value of €3

Share capital at 31 December 2017 212,658,725 Current stock option plans 783,204 1 July 2008 plan: 355,025 options at €38.50 25 June 2009 plan: 272,752 options at €32.88 23 September 2010 plan: 70,050 options at €26.34 15 September 2011 plan: 85,377 options at €26.34 Maximum potential capital (+0.37%) 213,441,929

4.2.2.2 Outstanding securities giving access to share capital (bonds, warrants and options)

At 31 December 2017, excluding the exercise of stock options, if any, Share purchase and stock subscription options there were no other outstanding securities giving immediate or future At 31 December 2017, the following were outstanding: access to the share capital. • 850 share purchase options at a weighted average exercise price For convenience, even though they have no impact on the potential of €38.50; capital since they involve existing shares, share purchase options have been presented with stock subscription options in the paragraph on the • 783,204 stock subscription options at a weighted average financial statements of the parent company. exercise price of €34.13, of which 155,427 are subject to performance conditions. Thales decided to stop granting options in 2012.

4.2.3 Shareholders

4.2.3.1 Breakdown at 31 December 2017

Breakdown of shareholders Breakdown of exercisable voting rights

Employees 3% Employees 4%

Public Sector 26% Public Sector 36%

Individual and institutional shareholders 46% Individual and institutional shareholders 32%

Dassault Aviation 25% Dassault Aviation 28%

Treasury stock n.m. 4

2017 Registration Document — THALES 179 Company and share capital — Share capital and shareholders

4.2.3.2 Shareholders acting with regard to Thales under Article L. 233- 10 of the French Commercial in concert Code, as TSA has a majority within the concert, sets out the following provisions (5): Members of the executive bodies of Thales 4.2.3.2.1 ”Public sector” (TSA) Thales’ Board of Directors, which has 16 members, has to adhere to the TSA is a holding company wholly owned by the French State at following breakdown at 31 December 2016: 31 December 2017. It directly holds 54,786,654 Thales shares. • 5 members proposed by the Public Sector; The French State directly holds 2,060 shares, including a golden • 4 members proposed by Dassault Aviation; share, which gives it the principal rights (1) described in Section • 2 employee representatives; 4.2.3.3.5. • 1 representative of employee- shareholders; • 4 external individuals, selected jointly by the Public Sector and Dassault Aviation. 4.2.3.2.2 ”Industrial Partner” (Dassault Aviation) The number of directors appointed upon the proposal of Dassault Dassault Aviation, whose shares are listed on the Euronext Paris market, Aviation may not be higher than the number of directors appointed is a public limited company that owns 24.70% of Thales’ share capital, upon the proposal of the Public Sector. The number of Directors for each i.e. 52,531,431 Thales shares at 31 December 2017. will be at least equal to the greater of the following two numbers: (i) the number of directors other than the employee representatives and Dassault Aviation is controlled by the company Groupe Industriel external individuals, multiplied by the percentage of Thales shares held Marcel Dassault (GIMD) which at 31 December 2017 held 62.17% of by Dassault Aviation, compared to the amount of Public Sector and the share capital and 76.79% of the exercisable voting rights of Dassault Aviation holdings and (ii) the number of directors representing Dassault Aviation. the employees. Should Dassault Aviation’s shareholding exceed that of the Public 4.2.3.3 Shareholders’ agreement, Sector, the parties to the agreement will increase the total number of Thales directors from 16 to 17, so as to be represented by five directors agreement on the protection each. of strategic national interests, The Chairman and CEO is chosen on the joint proposal of the parties. specific agreement Furthermore, the parties have agreed that, in the event of a change of and golden share Chairman and CEO in accordance with the terms of the shareholders’ agreement, they do not intend to propose as a candidate any By signing in 2009 an “endorsement agreement” with the French State employee, manager or senior executive belonging to the Dassault and Alcatel-Lucent, Dassault Aviation assumed the rights and group or having recently left this group. obligations of Alcatel- Lucent, subject to certain amendments, by Finally, it is specified that at least one director representing each of the endorsing the agreements signed on 28 December 2006 – namely the parties must sit on each of the committees of the Thales Board of shareholders’ agreement and the agreement on the protection of Directors. strategic national interests in Thales (2). Decisions to be submitted to the Thales Board of Directors 4.2.3.3.1 Shareholders’ agreement The parties undertake to submit for mandatory approval by the majority between the “Public Sector” of the Directors representing Dassault Aviation, decisions of the Thales and the “Industrial Partner” Board of Directors relating in particular to the appointment and dismissal of the Chairman and CEO, the adoption of the annual On 28 December 2006, TSA and Alcatel-Lucent signed a budget and the multi- year strategic plan, and significant acquisitions shareholders’ agreement that governs relations between the Public and disposals of shareholdings or assets (in excess of €150 million) as Sector and the Industrial Partner within Thales. well as strategic alliance agreements on technological and industrial cooperation. This agreement came into effect on the date of transfer of assets from Alcatel- Lucent Participations (5 January 2007). The agreement was However, Dassault Aviation has expressly undertaken to forego the signed pursuant to the cooperation agreement entered into on exercise of the right of veto which it has, by virtue of the agreement, 1 December 2006 between Thales, Alcatel-Lucent and TSA, which over some of Thales’ strategic operations; this decision concerns a replaced the previous cooperation agreement signed on series of potential acquisitions or disposals. In return, the Public Sector 18 November 1999 by Alcatel, Thales and GIMD (3) (4). has foregone its right to terminate the agreement in the event of persistent disagreement regarding a strategic operation likely to have On 19 May 2009, when Dassault Aviation acquired the Thales shares an adverse impact on its strategic interests (6). previously owned by Alcatel- Lucent, an agreement took effect under which Dassault Aviation endorsed the shareholders’ agreement existing Should Dassault Aviation exercise its right of veto over the appointment between Alcatel-Lucent and the Public Sector, subject to amendments. of the Chairman and CEO, after a consultation period of three months, The agreement under which TSA and Dassault Aviation act in concert either of the parties may terminate the agreement.

(1) Pursuant to Article 3 of decree No. 97- 190 of 4 March 1997. (2) See Decision No. 207C0013 of 2 January 2007, published in the French Legal Gazette (BALO) of 5 January 2007. (3) Published in the Official Journal of the French Republic on 12 December 2006 (see the Official Journal website: www.journal-officiel.gouv.fr) taken in accordance with the provisions of Article 1 – 1° of decree 93-1041 of 3 September 1993 and pursuant to law No. 86-912 of 6 August 1986. (4) This agreement is set out in the appendice to the Thales Board of Directors’ report to the Extraordinary General Meeting of 5 January 2007, registered by the AMF on 19 December 2006 under number E.06-194 (www.thalesgroup.com). (5) With regard to a proposal to separate the functions of CEO and Chairman, an amendment to the shareholders’ agreement regarding Thales was concluded between the Public Sector and Dassault Aviation on 7 April 2015, designed to amend the shareholders’ agreement so that the Board of Directors of Thales is composed of 18 members including 6 proposed by the Public Sector, 5 by the Industrial Partner (Dassault Aviation), 2 employee representatives, 1 representative of employee-shareholders and 4 external individuals. As the proposal to separate the functions of CEO and Chairman was rejected, the shareholders’ agreement was reverted to its initial version dated 19 May 2009 through a second amendment signed on 13 May 2015, and the stipulations of the agreement therefore remain unchanged. For more details on these amendments, refer to D&I 215C0404 of 7 April 2015 and D&I 215C0643 of 15 May 2015 published on the AMF’s website. (6) Acquisitions or disposals identified by the French State as having potentially significant importance with regard to its strategic defence interests and having the objective of strengthening the industrial and technological defence base in France.

180 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

Shareholder interests • Dassault Aviation must make its best efforts to prevent any action or influence in the governance and businesses of Thales by foreign Dassault Aviation must hold at least 15% of the share capital and voting national interests. In this respect, in the event of (i) a serious and rights in Thales and remain the largest private shareholder in Thales. unremedied breach by Dassault Aviation of its obligations under the The Public Sector must take whatever measures are required to enable agreement on the protection of strategic national interests or if it Dassault Aviation to comply with this undertaking. emerges that the application of a foreign law by Dassault Aviation The Public Sector undertakes to restrict its shareholding to 49.9% of creates constraints for Thales that substantially compromise the Thales’ capital and voting rights. protection of the strategic interests of the French State, or (ii) a change in control within Dassault Aviation, contrary to the strategic Term of the shareholders’ agreement interests of the Public Sector, the Public Sector may: In the absence of termination on expiry of the contract on – terminate the rights that Dassault Aviation enjoys under the 31 December 2016, the agreement was tacitly renewed for another shareholders’ agreement; and, if it sees fit, period of five years, expiring on 31 December 2021. It may be tacitly – ask Dassault Aviation either to suspend the exercise of any voting renewed for five- year periods. rights it holds in excess of 10%, or The agreement will be automatically terminated and the concerted – ask it to reduce its shareholding to less than 10% of Thales’ action between TSA and Dassault Aviation will also automatically capital through the divestment of shares on the market (under cease should one of the parties commit, without prior consultation with conditions consistent with its financial interests and market the other party, an action which creates an obligation to make a public constraints). At the end of a six- month period from the date on offer for Thales. which it was asked to reduce its shareholding, if the shareholding of Dassault Aviation is still in excess of 10% of Thales’ capital, the Option of unilateral termination of the agreement French State may proceed with the aforementioned undertaking and agreement to sell to the Public Sector to sell. The Public Sector has the option of terminating the agreement and asking Dassault Aviation to suspend the exercise of the voting rights that 4.2.3.3.3 Crossing of thresholds it holds above a threshold of 10%, or to reduce its shareholding to less and declaration of intent than 10% of Thales’ capital, in the event of: Following the substitution of Alcatel- Lucent Participations by Dassault • a serious breach by Dassault Aviation of its obligations so as to Aviation, within the Concert formed with the Public Sector vis- à- vis substantially compromise the protection of the strategic interests of Thales and the disposal of Thales shares owned by GIMD to Dassault the French State, given that said obligations are subject to an Aviation, on 19 May 2009 the latter exceeded, jointly with the Public “agreement on the protection of strategic national interests in Thales” Sector, the thresholds of 25% of the voting rights, 1/ 3 of the capital and (see below); voting rights and 50% of the voting rights of Thales and, on • a change in control of Dassault Aviation. 20 May 2009, the threshold of 50% of the capital of Thales. In this respect, Dassault Aviation gives the Public Sector an irrevocable On 20 May 2009, the Public Sector, together with Dassault Aviation, and definitive undertaking to sell all shares held by Dassault Aviation exceeded the threshold of 50% of the capital of Thales. upon confirmation that Dassault Aviation’s shareholding of Thales has These changes were granted dispensation from the obligation to submit remained above 10% of Thales’ capital in the six months following the a proposal for a public offer. This decision is reproduced in Décisions Public Sector’s request to reduce its shareholding. 208C2115 of 27 November 2008 and published in the French Legal The Public Sector (1) was bound by an undertaking to hold a stake in Gazette (Bulletin officiel des annonces légales obligatoires, BALO), of Thales granting it at least 10% of the voting rights. This undertaking 1 December 2008. expired on 31 December 2014 (2). It is available on the BALO website at https://www.journal-officiel.gouv.fr/ balo/index.php. 4.2.3.3.2 Agreement on the protection Dassault Aviation announced it had individually exceeded the 25% of strategic national interests threshold of voting rights on 9 July 2012 and individually held 52,531,431 Thales shares representing 86,531,431 voting rights, Furthermore, on 19 May 2009 Dassault Aviation endorsed the equal to 25.96% of the capital and 29.33% of the voting rights at that “agreement on the protection of strategic national interests in Thales” date. signed on 28 December 2006 by Alcatel- Lucent and the French State in the presence of TSA. This endorsement gives rise to the following This threshold was crossed due to the allocation of double voting rights obligations for Dassault Aviation: to Dassault Aviation on a portion of its holding. • Dassault Aviation’s registered office and operational headquarters Dassault Aviation declared that, on 13 January 2016, it had (3) ”fallen must remain in France; below the threshold of 25% of the capital of the Company and that it individually owns 52,531,431 Thales shares representing 87,185,780 directors of Thales proposed by Dassault Aviation must be nationals • voting rights, or 24.90% of the capital and 28.59% of the Company’s of the European Union; voting rights.” 4 access to sensitive information concerning Thales is strictly controlled • Dassault Aviation also revealed that this threshold crossing was due to within Dassault Aviation; an increase in the total number of Thales shares and voting rights and • managers who are responsible for Dassault Aviation’s holdings in that, on this occasion, the concert party formed by TSA (Public Sector) Thales are French nationals; and Dassault Aviation had not exceeded any thresholds.

(1) TSA and Sofivision in accordance with the terms of AMF decision no. 208C2115. Sofivision was taken over by TSA in the second half of 2012. (2) See AMF decision No. 208C2115 of 27 November 2008 published in the French official bulletin of legal notices (BALO) of 1 December 2008, available for consultation on the AMF’s website. “The Public Sector shall agree to hold, following the standard expiration of the shareholders’ agreement, a stake in Thales granting it at least 10% of the voting rights, and up until the earliest of the following three dates: (i) 31 December 2014, (ii) three years as from the termination of the shareholders’ agreement or (iii) date on which Dassault Aviation ceases to hold at least 15% of Thales’ share capital.” (3) See AMF decision No. 216C0199, available for consultation on the AMF’s website.

2017 Registration Document — THALES 181 Company and share capital — Share capital and shareholders

4.2.3.3.4 Specific agreement Thales LAS France SAS (formerly known as Thales Air Systems SAS), Thales Nederland BV, Thales AVS France SAS (formerly known as On 28 December 2006, the French State (Ministry of Defence and Thales Avionics SAS), Thales Underwater Systems NV. Ministry of the Economy) and Thales signed an agreement to give the In addition, as a result of some of Thales activities, particularly in the French State control not only over the transfer of assets already defence sector, shareholders and investors may be subject to certain mentioned in the appendix to decree No. 97-190 of 4 March 1997, restrictions applicable to foreign investments in France in accordance but also over shares in Thales Alenia Space SAS (hereinafter referred to with Article L. 151-3 of the French Monetary and Financial Code and as the “Strategic Asset”). This agreement, to which the Industrial Partner Article 10 of law No. 86-912 of 6 August 1986 on the terms and is not party, was therefore not amended by the substitution of conditions of privatisation. Alcatel-Lucent by Dassault Aviation in May 2009 and thus continues to be effective.

a) Where the Strategic Asset is a company 4.2.3.4 Treasury shares (the “Strategic Company”) At 31 December 2017, Thales held 568,739 treasury shares (0.27% • Any proposed transfer of shares in the Strategic Company to a third of capital), i.e. the balance after shares bought and sold in the market party such that the third party exceeds the threshold of 33.3% of the or otherwise under the authorisations described below granted to the share capital. Board of Directors by the Annual General Meeting. • Any proposed transfer of shares in the Company that directly or Treasury shares are not subject to any restrictions and are freely transferable. indirectly controls the Strategic Company to a third party such that the third party exceeds the threshold of 33.3% of the share capital. 4.2.3.4.1 Authority to trade in the Company’s shares b) Where the Strategic Asset is an isolated asset, unincorporated division or branch of the business (the “Strategic Division”) At its meeting of 27 October 2016 at which it delegated to the • Any proposed transfer of shares in the Company that owns the Chairman & CEO the authority to trade in the Company’s shares in Strategic Division to a third party such that the third party exceeds 2017, the Board of Directors set the maximum purchase price at €100 the threshold of 33.3% of the share capital. per share. By decision of the Board of Directors of 4 April 2017, the maximum price was increased to €120 as from the Annual General • Any proposed transfer of shares in the Company that directly or Meeting on 17 May 2017. indirectly controls the company referred to in the previous paragraph to a third party such that the third party exceeds the threshold of The transactions carried out in 2017 show a net sale of 180,820 33.3% of the share capital. treasury shares, the details of which are as follows: transactions related to the delivery of securities to employees (net c) Any proposed transfer of sensitive assets to a third party • sale of 256,820 shares): – exercise of stock options and delivery of free shares to employees d) And any proposal intended to confer or having the effect (- 646,653 shares), of conferring particular rights on a third party – shares sold to employees under the 2017 employee shareholding Shall be disclosed to the French State, which undertakes to issue its scheme (- 462,167 shares), acceptance or refusal decision within thirty (30) working days from the – shares purchased directly in the market to meet the commitments receipt of said notification. Failure by the French State to communicate to employees of the 2017 delivery of free shares (852,000 shares); its decision during said time is deemed to signify acceptance of the • liquidity contract, net purchase for the period: 76,000 shares. proposed transaction. 4.2.3.4.2 Authority to cancel Company shares 4.2.3.3.5 Golden share held by the French State and other restrictions related to The 24-month authorisation granted to the Board of Directors by the foreign investments in France Annual General Meeting of 17 May 2017 to cancel – on one or more occasions – shares held by the Company, up to a limit of 10% of share The golden share held by the French State (1) entitles it to the following capital, as part of an authorisation to buy back its own shares, has not rights: been used. • “Any increase in the direct or indirect holding of securities, irrespective of the nature or legal form, beyond a threshold of 4.2.3.4.3 Allotment of free shares one-tenth, or a multiple thereof, of the capital or voting rights of the Company, by any natural person or legal entity, whether acting Allotment of free shares and/ or performance shares alone or in concert, must be approved in advance by the Minister The Board of Directors, with the approval of the Annual General for the Economy (…)”; Meeting, implemented a ninth free share allotment plan. “Upon the proposal of the Minister of Defence, a representative of • The Chairman and CEO (the only Company representative) is not the French State, appointed by decree, sits on the Board of entitled to benefit from this plan. Directors of the Company as a non- voting director”; The allotment on 28 September 2017 took the following form: • “(…) decisions to dispose of or assign by way of guarantee the assets specified in the appendix to this decree may be opposed.” Performance shares At 31 December 2017, these assets consisted of the majority of the • The allotted shares are all subject to the fulfilment of internal share capital in the following companies: performance conditions during the three financial years following the grant date. The performance criteria are current operating Thales DMS France SAS (formerly known as Thales Systèmes Aéroportés income (after restructuring), operating cash flow and order intake, SAS), Thales (Wigmore Street) Ltd, Thales Communications & Security SAS, with weightings of 60%, 15% and 25%, respectively;

(1) Pursuant to Article 3 of decree No. 97-190 of 4 March 1997.

182 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

• shares may be validated in tranches of one-third once the Board of • all designated beneficiaries of the plan are allotted shares validated Directors has approved the Group’s consolidated financial at the end of a four-year vesting period subject to compliance with statements for the three financial years concerned; the employment conditions stipulated under the plan’s rules. • the number of shares vested will not exceed the number of shares initially allotted;

Date of Board decision 28/ 09 / 2017 27 / 10 / 2016 17 / 09 / 2013 20 / 12 / 2012

Performance Free Performance Free Performance Free Performance shares shares shares shares shares shares shares

Number of beneficiaries at grant date 764 550 232 4,161 341 5,186 336 Share price at grant date €94.66 €83.10 €83.10 €39.16 €39.16 €27.47 €27.47 Number of shares allotted 212,540 88,020 148,070 424,830 299,460 487,940 230,350 Number of free shares at 31 / 12 / 2016 N /A 87,860 148,070 397,180 226,335 – – Cancellation of allotments during the financial year(a) – 300 310 9,274 7,638 – – Early allotments during the financial year (b) – – – – – – – Post- closing adjustments – – – – – 50 (c) – Number of shares delivered on expiry of the plan N /A N / A N / A 387,906 218,697 438,470 168,661 Number of beneficiaries of delivery on expiry N /A N / A N / A 3,793 304 4,649 300 Balance of free shares net of cancellations and early allotments at 31 / 12 / 2017 212,540 87,560 147,760 – – – – Number of beneficiaries remaining at 31/ 12 / 2017 764 547 231 – – – – Vesting period from 28 /09 /2017 from 27 / 10 / 2016 from 17 / 09 / 2013 from 20 / 12 / 2012 to 29 /09 /2021 to 28 / 10 / 2020 to 18 / 09 / 2017 to 21 / 12 / 2016

(a) Due to the departure of the beneficiary or, for the plans concerned, due to eliminations related to partial or total non- achievement of the performance conditions. (b) Due to death of the beneficiary during the vesting period. (c) Due to excessive eliminations in 2016.

Allotment of shares in financial year 2017

Ten largest allotments of shares to employees during the year Number of shares Share price at Date of plan allotted allotment date

Performance shares 212,540 €94.66 28 / 09 / 2017

During 2017, the allotment of shares subject to performance conditions to employees of the Company or its subsidiaries, excluding Thales executive officers, was between 80 and 4,700 shares.

4.2.3.4.4 Allotment of units or units Unit plan subject to employment and performance conditions subject to performance conditions The units subject to performance conditions follow the same rules as indexed to the Thales share price • for units, i.e. vesting period and employment conditions, but the number of units that are actually issued at the expiry date will No plan for the allotment of units was implemented for employees in depend on the fulfilment of internal performance conditions over the 2017 except for that granted for the only Company representative (see three financial years following their allotment date; units may be page 156). validated in tranches of one- third once the Board of Directors has Unit plan subject to performance conditions approved the Group’s consolidated financial statements for the three allotted in 2014 and 2015 financial years concerned; • Each unit allotted confers the right, at the end of the four- year vesting • the number of units validated may not exceed the amount initially period and subject to the employment condition stipulated in the allotted; regulations, to the payment of a monetary value; • the three performance criteria used for the 2014 and 2015 plans 4 • this monetary value will be calculated at the end of the vesting are EBIT, free operating cash flow and order intake, with weightings period, and will be equal to the average of the daily opening prices of 60%, 15% and 25%, respectively. for the Thales share during the vesting period. Extreme upwards or downwards variations in the stock market price will be neutralized; • the amount due at the expiry date to the beneficiaries that meet the employment conditions will be equal to the number of units allotted multiplied by the value of the unit. Half of the payment will be made in shares, while the other half will be paid in cash.

2017 Registration Document — THALES 183 Company and share capital — Share capital and shareholders

Date of Board decision 17 / 09 / 2015 16 / 09 / 2014

Units Performance Units Performance units units

Number of beneficiaries at grant date 3,885 293 3,684 310 Unit price at grant date €61.75 €61.75 €42.42 €42.42 Number of units allotted 376,840 232,000 425,920 281,050 Balance of units at 31 / 12 / 2016 367,730 229,200 405,210 268,000 Cancellation of allotments during the financial year (a) 9,050 7,750 8,210 9,300 Early allotments during the financial year (b) 270 – 240 – Post- closing adjustments (c) 620 Balance of units at 31 / 12 / 2017 359,030 221,450 396,760 258,700 Number of beneficiaries remaining at 31 / 12 / 2017 3,688 278 3,434 286 Vesting period from 17 /09 / 2015 from 16 / 09 / 2014 to 18 /09 / 2019 to 17 / 09 / 2018

(a) Due to the departure of the beneficiary or, for the plans concerned, due to eliminations related to partial or total non- achievement of the performance conditions. (b) Due to death of the beneficiary during the vesting period. (c) Cancellation error concerning people who are still part of the Group.

4.2.3.4.5 Allotment of phantom shares plan is equivalent to the performance-based free share plans offered to or phantom shares subject to employees in France. performance conditions indexed Through this plan, 307 people received 67,140 phantom shares under to the Thales share price the same performance conditions as the free shares allotted on the same date. In September 2017, a phantom share performance plan based on the Thales share price was put in place for all international employees. This

4.2.3.4.6 Validation of performance conditions for financial year 2017

Validation of the 1st third Validation of the 2nd third Validation of the 3rd third of the allotment of the allotment of the allotment

Option, share, unit and Reference% achievement Reference% achievement Reference% achievement phantom share plans subject year of performance year of performance year of performance to performance conditions conditions conditions conditions

16 September 2014 2015 100% 2016 100% 2017 100% 17 September 2015 2016 100% 2017 100% 2018 – 27 October 2016 2017 100% 2018 – 2019 – 28 September 2017 2018 – 2019 – 2020 –

4.2.3.4.7 Description of the share buy- back • to ensure trading in the shares through a liquidity contract prepared programme proposed to the Annual in accordance with a code of Conduct approved by the AMF; General Meeting of 23 May 2018 • to cancel shares in accordance with an Annual General Meeting resolution in force; • Maximum proportion of capital subject to repurchase: 10%, on the buy- back date. • to carry out in general any transaction in accordance with applicable • Maximum number of shares that may be purchased: 21,265,872. regulations. • Maximum amount of the programme: €2,658,234,000. • Duration of the programme: eighteen months from the date of Maximum unit purchase price: €125. • approval of the resolution that will be submitted to the Annual General Objectives of the programme Meeting of 23 May 2018, i.e. no later than 21 November 2019. • To sell or allot shares to Group employees under the conditions and • Liquidity contract: in November 2004, Thales signed a liquidity in the manner stipulated by law, particularly when share purchase contract, in accordance with the AFEI code of Conduct, in order to options are exercised or existing free shares are allotted, or when regulate share trading. The contract was amended to comply with shares are sold and /or supplemented under an employee the AFEI code of Conduct appended to the AMF decision of shareholding scheme transaction on existing shares; 22 March 2005. • to retain shares for later use in connection with acquisitions, mergers, demergers or contributions;

184 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

4.2.3.5 Shares owned by the public Based on the most recent surveys on identifiable holders of bearer shares carried out by Euroclear France, and the Company’s information The Company is entitled at all times, as provided by law, to ascertain on employee shareholders, private ownership of Company shares is the identity of and the number of shares held by holders of bearer estimated as follows: shares, which now or in the future, represent a specific fraction of its share capital (the “TPI” Identifiable Bearer Security procedure).

(in thousands of shares) 31 / 12 / 2017 31 / 12 / 2016

French institutional investors 26,308 22,491 Non- resident institutional investors 62,434 65,668 Others (e.g. brokerage firms) 3,802 4,212 Company employee savings scheme 6,181 5,743 Individual shareholders and associations (a) 5,735 5,285 Not identified 2 726 S / Total Entire public 104,772 104,125 TOTAL NUMBER OF SHARES 212,659 212,195

(a) Mainly French residents.

As % of the total capital As % of the free float (excluding treasury shares)

31 / 12 / 2017 31 / 12 /2016 31 / 12 / 2017 31 / 12 / 2016

French institutional investors 12.4% 10.6% 25.1% 21.6% Non- resident institutional investors 29.4% 30.9% 59.5% 63.1% Others (e.g. brokerage firms) 2.0% 2.0% 4.0% 4.0% Company employee savings scheme 2.6% 2.7% 5.4% 5.5% Individual shareholders and associations 2.7% 2.5% 5.5% 5.1% Not identified 0.3% 0.3% 0.5% 0.7% ENTIRE PUBLIC 49.3% 49.1% 100.0% 100.0%

• GEOGRAPHIC BREAKDOWN OF INSTITUTIONAL INVESTORS

31 / 12 / 2017 Number of shares As % of the As % of the Number of held (in thousands) total capital free float investors

France 26,308 12.37% 26.54% 87 Continental Europe (exc. France) 13,136 6.18% 13.25% 143 North America 24,530 11.53% 24.74% 147 United Kingdom & Ireland 21,688 10.20% 21.88% 76 Rest of world 3,079 1.45% 3.11% 50 TOTAL 88,741 41.73% 89.51% 503 4

2017 Registration Document — THALES 185 Company and share capital — Share capital and shareholders

4.2.3.6 Employee shareholdings through the Group savings scheme (PEG), either directly or via the at 31 December 2017 Company Mutual Fund (FCPE) or its equivalent in the UK, or directly through the allotment of free shares. At 31 December 2017, Group employees held, within the meaning of At 31 December 2017, approximately 65% of the Thales shares held Article L. 225- 102 of the French Commercial Code, 6,181,444 Thales by employees were freely transferable (compared with 60% at shares, representing 2.91% of the capital (and 3.50% of voting rights) 31 December 2016).

Holding by country In number In % of In % Related of shares employee of capital voting rights shareholders as % of total L. 225-10 (d) voting rights

France and world (three dedicated funds (a)) 3,827,921 61.93% 1.80% 2.38% Netherlands (two dedicated funds (b)) 71,469 1.16% 0.03% 0.04% United Kingdom (SIP – Trust (c)) 207,053 3.35% 0.10% 0.07% Shares directly held in the Group savings scheme (2002, 2008, 2013, 2015 and 2017 schemes) 81,031 1.31% 0.04% 0.04% Shares directly held resulting from the allotment of free shares (Article L. 225- 197- 1 of the French Commercial Code) 1,954,949 31.63% 0.92% 0.96% Total Article L. 225- 102 of the French Commercial Code 6,181,444 100.00% 2.91% 3.50% Total number of shares held by employees 6,181,444 100.00% 2.91% 3.50% TOTAL SHARE CAPITAL 212,658,725

(a) ”Actions Thales”, “World Classic”, and “Action Protect 2013” funds. (b) ”Netherlands Classic” and “Netherlands Action Protect 2013” funds. (c) Share Incentive Plan. (d) L. 225- 10 of the French Commercial Code.

186 THALES — 2017 Registration Document Share capital and shareholders — Company and share capital

4.2.3.7 Summary statement of transactions indicated in Article L. 621- 18-2 of the French Monetary and Financial Code carried out in 2017

In accordance with Article 223- 26 of the General Regulations of the French financial markets authority (AMF). To the best of the Company’s knowledge, the following disclosures have been made to the AMF, for publication on its website (http://www.amf-france.org ):

Director’s name Financial instrument Type of transaction Transaction amount Unit price (in euros) (in euros)

Alexander Cresswell Share Sale 204,908.00 93.14 Marc Darmon (a) Share purchase options Exercise 263,040.00 32.88 Share purchase options Exercise 52,680.00 26.34 Share purchase options Exercise 55,314.00 26.34 Share purchase options Exercise 65,760.00 32.88 Share purchase options Exercise 76,386.00 26.34 Share Sale 196,000.00 98.00 Share Sale 209,412.00 99.72 Share Sale 190,000.00 95.00 Delphine Gény-Stephann Share Acquisition 49,995.00 99.99 Michel Mathieu Share purchase options Exercise 158,040.00 26.34 Share Sale 312,320.00 97.60 Gil Michielin Share purchase options Exercise 28,789.62 26.34 Share Sale 107,463.76 98.32 Pierre-Éric Pommellet Share purchase options Exercise 39,510.00 26.34 Share purchase options Exercise 21,072.00 26.34 Share purchase options Exercise 192,044.94 26.34 Share Sale 132,600.00 88.40 Share Sale 78,280.00 97.85 Share Sale 686,958.02 94.22 Pascale Sourisse Share purchase options Exercise 184,380.00 26.34 Share purchase options Exercise 156,591.30 26.34 Share Sale 615,300.00 87.90 Share Sale 523,160.00 88.00

(a) This refers to individuals required to make a disclosure as indicated in Articles L. 621-18- 2 a), b) and c) of the French Monetary and Financial Code. The individuals concerned by Article L. 621- 18- 2 b) of the French Monetary and Financial Code include the members of the Executive Committee.

Moreover, the final share allotment, following the purchase period These statements related to the following individuals: Messrs. Patrice provided for in the free share allotment plan regulation of Caine, Pascal Bouchiat, Millar Crawford, Alexander Cresswell, Marc 17 September 2013, resulted in statements sent to the AMF and Darmon, Philippe Duhamel, Jean- Loïc Galle, Michel Mathieu, Gil published on its website (http://www.amf- france.org). Michielin and Ms. Pascale Sourisse. 4

2017 Registration Document — THALES 187 Company and share capital — Share capital and shareholders

4.2.3.8 Trading in company shares during 2017

In 2017, Thales traded in Company shares as part of its share 17 May 2017, and in accordance with the authorisation given by the buy-back programme drawn up in accordance with the AMF General Annual General Meeting of 17 May 2016 for transactions performed Regulations (Article 241- 1 et seq.). between 18 May 2017 and 31 December 2017. These transactions were carried out as part of the share buy-back At 1 January 2017, Thales held 749,559 treasury shares, representing programme authorised at the Annual General Meeting of 0.35% of the capital, compared with 568,739 treasury shares at 18 May 2016 for transactions performed between 1 January 2017 and 31 December 2017.

The net balance of 2017 trading was the disposal of 180,820 shares, broken down by objective as follows: a) Net disposal or allotment of shares to Group employees and directors in the manner stipulated by law, particularly when share purchase options are exercised or existing free shares are allotted, and employee shareholding plans (256,820) b) Regulation of the market price by a liquidity contract drawn up in accordance with the AFEI code of Conduct 76,000

Breakdown of treasury shares by objective at 31 December 2017 The total number of shares held at that date was 568,739, representing 0.27% of Thales’ share capital. The breakdown by objective was as follows: a) Disposal or allotment of shares to Group employees and directors as stipulated by law, particularly when share purchase options are exercised or existing free shares are allotted 492,739 b) Regulation of the market price by a liquidity contract drawn up in accordance with the AFEI code of Conduct 76,000

Market value of the portfolio at 31 December 2017 €51,118,261.32, at the closing price on 29 December 2017, i.e. €89.88.

Aggregate gross amounts Positions open on the date of the programme description from 1 January 2017 to 31 December 2017 Open purchase positions Open sale positions

Purchases Sales Calls Puts Forward Calls Puts Forward purchased sold purchases purchased sold sales

No. of shares 1,671,512 1,852,332 – – – – – –

Average maximum maturity Average transaction price (in euros) including possible discounts and free shares 93.255 51.784 – – – – – –

Average exercise price Amounts (in euros) 155,876,190 95,920,532 – – – – – –

Thales did not make use of derivatives (futures sales) as part of this redemption programme.

188 THALES — 2017 Registration Document Related-party agreements — Company and share capital

4.3 RELATED-PARTY AGREEMENTS

4.3.1 Commitments and agreements authorised after year end

On the date this document was filed, three new related-party The payment of this compensation will be subject to the fulfilment, as commitments covered by Article L. 225-42- 1 of the French Commercial recorded by the Board, of performance conditions established by the Code had been authorised by the Board of Directors since year end. latter subject to compliance with the following condition: the payment will be made if the average rate of achievement of the annual At its meeting on 5 March 2018, the Board of Directors authorised the operational profitability objectives is equal to or higher than 80% over renewal, under the terms and conditions specified below and in the the past three years. 2017 Corporate Governance report (Section 3.2.2.1), of three remuneration items which had been authorised by the Board on If that is not the case, no compensation payment will be due. 25 February 2015 and put in place for the benefit of the Chairman and CEO upon termination of his employment contract. As their duration is • Renewal for Mr Patrice Caine, Chairman and CEO, of private linked to that of his current term of office, it was the Board’s intention to employment insurance subscribed to by the Company authorise them again in the event of the renewal of said term of office Entitlement to this insurance is subject to the same performance condition following the Annual General Meeting of 23 May 2018. These as the above- mentioned compensation for the termination. commitments were authorised on the condition of renewal of the term of office as director of Mr Patrice Caine by the Annual General Meeting Commitment related to the deferred progressive and of 23 May 2018 called to vote on the financial statements for the year • conditional compensation scheme applicable to Mr Patrice Caine, ended 31 December 2017 and the renewal of his term of office as since his appointment as Chairman and CEO Chairman and CEO by the Board of Directors which will take place following this meeting. The amount of this compensation is calculated based on the point allocation method identical to that used for employees entitled to the These commitments were the subject of a press release dated 9 March additional group retirement scheme applicable within Thales group. 2018, available on the Company’s website (www.thalesgroup.com). This deferred compensation is only deemed to have been acquired on • Compensation payments likely to be payable to Mr Patrice Caine, condition that the Company representative has carried out a full term in Chairman and CEO, upon termination of his term of office office. Entitlement is subject to the same performance condition as the as Company representative above- mentioned compensation for the termination. Subject to the fulfilment of the performance conditions imposed by the An increase in this deferred compensation,will be applied provided that Board of Directors and if so decided by the Board, compensation may the Chairman and CEO has a minimum of 10 years’ service as part of be paid to Mr Patrice Caine, if his term of office as Company the Thales Executive Committee. representative should be terminated, except in the case of resignation, More information on these three related-party commitments is provided serious misconduct or gross negligence. in Section 3.2.2.1. The amount of compensation is fixed at 12 months of his reference salary (fixed and variable compensation paid over the last 12 months of activity, excluding long- term compensation).

4.3.2 Commitments and agreements authorised during 2017

In 2017, one related- party agreement was authorised by the Board of 29 September 2009. These amendments took effect on Directors. 1 December 2017, following the conclusion, on 26 January 2018, of an amendment to the agreement. At its meeting on 28 November 2017, Board of Directors’ meeting on Tuesday, the Board of Directors also ruled on the downgrading, with effect from November 28, 2017 these amendments, of the aforementioned agreement on assistance to a current agreement pursuant to the French Commercial Code. Amendment to the agreement on assistance to TSA Under this agreement, Thales provides TSA with assistance from the At its meeting on 28 November 2017, the Board of Directors Group’s specialist financial, legal and administrative services, since authorised certain amendments to the agreement on assistance to TSA, TSA no longer has the internal resources to operate alone. 4 the signing of which was authorised by the Board of Directors on

2017 Registration Document — THALES 189 Company and share capital — Related-party agreements

4.3.3 Agreements authorised during previous financial years

The agreements authorised by the Board of Directors and approved by The increase in this deferred compensation is subject to a minimum the Annual General Meeting in previous financial years that continued of ten years’ service as part of the Thales Executive Committee. to be performed in 2017 have been disclosed to the statutory auditors These commitments, authorised by the meeting of the Board of Directors in accordance with the applicable regulations. They are also described held on 25 February 2015, were approved at the Annual General in a special report presented to the Annual General Meeting called to Meeting of 13 May 2015 (resolutions 14, 15 and 16, respectively). approve the financial statements for 2017. These commitments will expire, at the same time as the Chairman and CEO’s current term of office, at the end of the Annual General Meeting Board of Directors’ meeting on 23 May 2018. Their early renewal was authorised by the Board of held on 25 February 2015 Directors on 5 March 2018 under the terms and conditions specified in On 25 February 2015, the Board of Directors authorised three Section 4.3.1. related-party commitments under Article L. 225-42- 1 of the French Commercial Code, relating to: Board of Directors’ meeting held on 29 September 2009 1. Compensation payments likely to be payable to Mr Patrice Caine, Chairman and CEO, upon termination of his term of office as Assistance agreement between Thales and TSA Company representative. The services invoiced from 1 January 2017 to 30 November 2017 by Subject to the fulfilment of the performance conditions imposed by Thales to TSA under the assistance agreement, covering the provision of the Board of Directors and if so decided by the Board, administrative, legal and financial services provided by Thales to TSA, compensation may be paid to Mr Patrice Caine, if his term of office came to €452,833 excluding tax. This agreement was downgraded as Company representative should be terminated, except in the with effect from 1 December 2017 to a current agreement pursuant to case of resignation, serious misconduct or gross negligence. Article L. 225- 39 of the French Commercial Code (see Section 4.3.2). The amount of compensation is fixed at 12 months of his reference Board of Directors’ meeting salary (fixed and variable compensation paid over the last 12 held on 6 March 2008 months of activity). FSTA: commitments to be undertaken by the parent company, Payment of this compensation will be subject to the Board’s authorised by the meeting of the Board of Directors on 6 March 2008 assessment as to whether the performance criteria set by the Board have been met under the following conditions: Having noted the characteristics of the “FSTA” public-private partnership, which has a significant importance and high visibility for – if the departure takes place before the end of the 2017 financial the Group, and which thus consolidates its presence in the United year, compensation will be paid if the average level of Kingdom, the Board of Directors: achievement of the targets for annual operating profit is at least 80%, depending on the financial criteria available for the period • has approved the transaction to be concluded by Thales UK Ltd in between the start and end of the term of office, its capacity as a member and subcontractor of the consortium (Thales UK Ltd has since then assumed the subcontracting – if the departure occurs after the closure of the 2017 financial commitments of the companies Thales Avionics Ltd, Thales year, compensation will be paid if the average level of Training & Simulation Ltd and Thales Air Operations Ltd); achievement of the targets for annual operating profit is at least 80% over the last three full financial years. • has approved the issue of the three guarantees required (Resources and Materials parent company Guarantee, Opco Primary If that is not the case, no compensation payment will be due. Subcontracts parent company Guarantee and Deed of Indemnity 2. The private unemployment insurance that the Company has decided and Security) as per the terms submitted to it; to subscribe for the benefit of Mr Patrice Caine and for which has delegated to the chairman, who may sub-delegate, all powers entitlement is subject to the same performance condition as the • necessary for the fulfilment of these guarantees, for the signature of above- mentioned compensation for termination. any deeds or documents, and in general to do what is necessary 3. The deferred incremental and conditional compensation scheme for for carrying out this operation. the “Company representative” applicable to Mr Patrice Caine, from For the period from 28 October 2016 to 27 October 2017, Thales 1 January 2015. invoiced Air Tanker in the amount of £312,668.00 (or €364,584.89), The amount of this compensation is calculated based on the point pursuant to letters of credit in force. allocation method identical to that used for employees entitled to the additional group retirement scheme applicable within Thales group. It is only deemed to have been acquired on the condition of carrying out a full term of office, and its benefit is subject to the achievement of the following performance condition: if the average level of achievement of the annual operating margin targets set by the Board of Directors for the Company representative is equal to or greater than 80% for the last three full financial years.

190 THALES — 2017 Registration Document Related-party agreements — Company and share capital

4.3.4 Statutory auditors’ special report on related-party agreements and commitments

This is a translation into English of a report issued in French and it is provided solely for the convenience of English-speaking users. This report should be read in conjunction with and construed in accordance with French law and professional standards applicable in France.

To the General Shareholders’ Meeting of Thales S.A., statements. As a result, the scope of services provided by Thales to TSA has been reduced. In our capacity as your company’s statutory auditors, we hereby report to you on regulated party agreements and commitments. Agreements and commitments authorized It is our responsibility to report to shareholders, based on the information and concluded after closing provided to us, on the main terms and conditions of agreements and commitments that have been indicated to us or that we may have identified We have been informed of the following agreements and commitments as part of our engagement, without commenting on their relevance or authorized and concluded by the Board of Directors, after closing. substance or identifying any undisclosed agreements or commitments. Under the provisions of Article R. 225- 31 of the French Commercial Code, With Mr. Patrice Caine, Chairman and Chief Executing Officer it is the responsibility of the shareholders to determine whether the agreements • since 23 December 2014 and commitments are appropriate and should be approved. At its meeting on 5 March 2018, the Board of Directors authorized, Where applicable, it is also our responsibility to provide the subject to the renewal of the term of office of Mr. Patrice Caine by the shareholders with the information required by Article R. 225- 31 of the General Shareholders’ Meeting on 23 May 2018 called to approve French Commercial Code in relation to the implementation during the the financial statements for the year ended 31 December 2017 and the year ended 31 December 2017 of the agreements and commitments renewal of the mandate of Chairman and Chief Executive Officer by previously approved by the Shareholders’ Meeting. the Board of Directors which will be held at the end of this General We performed the procedures that we deemed necessary in Meeting, the renewal of the following regulated commitments, already accordance with the guidance issued by the French Institute of statutory authorized by the Board of Directors held on 25, February 2015, and auditors (Compagnie nationale des commissaires aux comptes) for this approved by the Shareholders’ Meeting of 13, May 2015, the execution type of engagement. These procedures consisted in verifying that the of which continued during the year ended 31 December 2017: information given to us is consistent with the underlying documents. Commitment related to compensation payments likely to be payable to Mr. Patrice Caine upon termination Agreements and commitments submitted for of this term of office as Company representative approval to the General Shareholders’ Meeting Subject to the fulfilment of the performance conditions imposed by the Agreements and commitments authorized Board of Directors and if so decided by the Board, compensation may and concluded during year ended 31 December 2017 be paid to Mr. Patrice Caine, if his term of office as Company representative should be terminated, except in the case of resignation, In accordance with Article L. 225-40 of the French Commercial Code, serious misconduct or gross negligence. we have been informed of the following agreement concluded and authorized during the year ended 31 December 2017 by the Board of The amount of compensation is fixed at 12 months of his reference Directors. salary (fixed and variable compensation paid over the last 12 months of activity, excluding long- term compensation). With TSA (shareholder of 25.76% of Thales) • The payment of this compensation will be subject to the fulfilment, as confirmed by the Board, of performance conditions established: Amendment to the agreement on assistance to TSA namely, if the average rate of achievement of the annual operational At its meeting on 28 November 2017, the Board of Directors profitability objectives is equal to or higher than 80% over the past three authorized certain amendments to the agreement on assistance to TSA, years. the signing of which was authorized by the Board of Directors on If that is not the case, no compensation payment will be due. 29 September 2009. These amendments took effect on 1 December 2017, following the conclusion, on 26 January 2018, of Commitment related to a private unemployment an amendment to the agreement. At its meeting on 28 November 2017, insurance scheme for Mr. Patrice Caine the Board of Directors also ruled on the downgrading, with effect from these amendments, of the aforementioned agreement on assistance to a The private unemployment insurance that the Company has decided to current agreement pursuant to the French Commercial Code. subscribe to the benefit of Mr. Patrice Caine and for which entitlement to this insurance is subject to the same performance condition as the Under this agreement, Thales provides TSA with assistance from the above- mentioned compensation for the termination. 4 Group’s specialist financial, legal and administrative services, since TSA no longer has the internal resources to operate alone. Commitment related to the deferred progressive and conditional Royalties invoiced by Thales from 1 January to 30 November 2017 compensation scheme applicable to Mr. Patrice Caine under this agreement amounted to EUR 452,833 excluding taxes. The amount of this compensation is calculated based on the point TSA, which holds more than 10% of the voting rights of your company, allocation method identical to that used for employees entitled to the is controlled by the French State in accordance with Article L. 233- 3. additional group retirement scheme applicable within Thales group. The persons concerned are the directors of your company proposed by It is only deemed to have been acquired: the French State, namely Mrs. Laurence Broseta. • on the condition of carrying out a full mandate, and is subject to the same performance condition as the above-mentioned Reasons justifying why the Company benefits from this agreement • compensation for the termination. Your Board of Directors has motivated this agreement as follows: The annuity increase is subject to a minimum of 10 years’ service as At the year ended 31 December 2017, TSA has no remaining Participating part of the Thales Executive Committee. Securities and is no longer required to prepare consolidated financial

2017 Registration Document — THALES 191 Company and share capital — Related-party agreements

Reasons justifying why the Company benefits from this agreement • With Thales UK, a wholly-owned subsidiary of Thales These three elements were put in place after Mr. Patrice Caine had Commitments to be undertaken by the parent company terminated his employment contract. As their duration is linked to his within the public-private partnership “FSTA” current mandate, the Board of Directors has decided to authorize them again in view of the renewal of this mandate at the end of the General Under the partnership public-private “FSTA”, Thales granted guarantees Meeting of 23 May 2018. to Thales UK Ltd, as a member of the consortium Air Tanker (Thales UK Ltd had taken over the subcontracting commitments of Thales Avionics Ltd, Thales Training & Simulation Ltd and Thales Air Operations Ltd). Agreements and commitments previously approved by the Shareholders’ Meeting At its meeting held on 6 March 2008, the Board of Directors approved the issuance of the three required guarantees (“Resources and Materials Agreements and commitments approved in previous years Parent Company Guarantee”, “Opco Primary Subcontracts Parent whose implementation continued during the year Company Guarantee” and “Shareholder Deed of Indemnity and ended 31 December 31 2017 Security”) as per the terms submitted to it. In accordance with Article R. 225-30 of the French Commercial Code, Pursuant to letters of credit in force to cover the following period from we have been informed of the following agreements and commitments 28 October 2016 to 27 October 2017, Thales invoiced Air Tanker the approved in prior years and which continued during the year ended total amount of GBP 312,668 (EUR 364,584.89). 31 December 31 2017.

Courbevoie and Paris- La Défense, March 5, 2018 The statutory auditors Mazars Ernst & Young Audit Anne-Laure Rousselou Philippe Diu Jean-Marc Deslandes Serge Pottiez

192 THALES — 2017 Registration Document Stock market information and financial communication — Company and share capital

4.4 STOCK MARKET INFORMATION AND FINANCIAL COMMUNICATION

4.4.1 Thales shares

4.4.1.1 Listing markets 4.4.1.2 Index listing

Thales’ stock is listed on the Euronext Paris regulated market At 31 December 2017, Thales stock was included in the following main (Compartment A). It is eligible for the SRD deferred settlement system. indices: ISIN code (1): FR0000121329 • NYSE Euronext Paris indices: CAC Next 20, SBF 120, SBF 250, Reuters: TCFP.PA CAC Large60 and CAC All-Shares. The market capitalisation used Bloomberg: HO FP to select stocks in the NYSE Euronext Paris indices is calculated on the basis of the free float (2) and not on the total number of shares outstanding. For information, based on the 2017 closing price, Thales’ total market capitalisation was €19,550 million; • international indices: DJ Euro Stoxx, FTSEurofirst 300.

4.4.1.3 Share price and trading volumes on Euronext Paris

4.4.1.3.1 Monthly data from January 2016 to December 2017 (share prices in euros)

No. of No. of Total Average Weighted Share Share Closing trading shares value daily average price price price days traded traded volume price High Low (€m)

2017 January 22 5,563,759 494.75 252,898 88.92 92.800 85.990 86.780 February 20 5,947,267 532.04 297,363 89.46 93.920 87.200 93.000 March 23 6,531,262 588.54 283,968 90.11 93.470 87.870 90.660 Q1 2017 65 18,042,288 1,615.33 277,574 89.530 93.920 85.990 90.660 April 18 4,687,059 435.05 260,392 92.82 96.940 89.170 96.520 May 22 5,421,844 531.51 246,447 98.03 99.670 96.060 98.320 June 22 6,135,606 599.51 278,891 97.71 100.450 93.850 94.240 Q2 2017 62 16,244,509 1,566.07 262,008 96.406 100.450 89.170 94.240 July 21 5,384,116 509.83 256,386 94.69 97.470 92.350 93.590 August 23 4,493,019 422.51 195,349 94.04 96.250 91.080 93.065 September 21 5,300,997 497.73 252,428 93.89 96.350 92.210 95.734 Q3 2017 65 15,178,132 1,430.07 233,510 94.219 97.470 91.080 95.734 October 22 7,660,946 713.32 348,225 93.11 97.320 88.000 89.396 November 22 7,741,193 680.93 351,872 87.96 90.560 83.510 84.971 December 19 7,842,087 693.45 412,741 88.43 94.600 83.250 89.880 4 Q4 2017 63 23,244,226 2,087.70 368,956 89.816 97.320 83.250 89.880 2017 255 72,709,155 6,699.17 285,134 92.137 100.450 83.250 89.880

(1) International Securities Identification Numbers. (2) As per the definition of the NYSE Euronext Indices Steering Committee (Conseil Scientifique des Indices), the free float corresponds to the total capital less treasury shares, shares held directly or indirectly by the founders and /or the French government, controlling interests and shares subject to a shareholders’ agreement that do not fall under the above-mentioned categories and shareholdings that are deemed stable.

2017 Registration Document — THALES 193 Company and share capital — Stock market information and financial communication

No. of No. of Total Average Weighted Share Share Closing trading shares value daily average price price price days traded traded volume price High Low (€m)

2016 January 20 8,896,397 618.32 444,820 69.502 73.950 66.500 70.170 February 21 9,904,954 658.55 471,664 66.487 73.410 59.770 73.410 March 21 7,559,496 559.71 359,976 74.041 77.620 70.420 77.000 Q1 2016 62 26,360,847 1,836.58 425,175 69.671 77.620 59.770 77.000 April 21 6,293,902 479.04 299,710 76.112 79.230 74.350 75.500 May 22 6,081,556 465.59 276,434 76.558 78.110 74.620 77.785 June 22 7,432,393 550.29 337,836 74.040 77.910 67.650 75.010 Q2 2016 65 19,807,851 1,494.92 304,736 75.471 79.230 67.650 75.010 July 21 6,574,729 512.70 313,082 77.980 82.570 73.050 81.490 August 23 4,815,365 389.00 209,364 80.783 83.400 77.530 77.630 September 22 6,319,531 507.02 287,251 80.231 82.750 76.950 81.990 Q3 2016 66 17,709,625 1,408.72 268,328 79.545 83.400 73.050 81.990 October 21 6,276,943 524.30 298,902 83.528 86.100 80.360 85.770 November 20 8,527,155 763.72 426,358 89.563 93.160 83.330 92.130 December 21 5,655,754 515.59 269,322 91.162 93.330 89.230 92.130 Q4 2016 62 20,459,852 1,803.61 329,998 88.154 93.330 80.360 92.130 2016 255 84,338,175 6,543.83 330,738 77.590 93.330 59.770 92.130

4.4.1.3.2 Annual data from 2016 and 2017 (share prices in euros)

• SHARE PRICE AND PERFORMANCE

2017 2016

Closing price 89.88 92.13 Session high 100.45 93.33 Session low 83.25 59.77 Weighted average price 92.14 77.59 Net dividend in respect of the previous year 1.60 1.36 Total shareholder return (TSR) (a) –0.71% 35.7% Change in Thales stock over the period (%) –2.44% 33.3%

CAC 40 performance over the period (%) 9.3% 7.5%

CAC Next 20 performance over the period (%) 12.8% 3.6%

(a) Total shareholder return: differential between annual closing prices, plus dividend after tax credit paid during the year in respect of the previous year, relative to the opening price.

2017 2016

Average number of shares traded daily (thousands) 285.1 330.7 Total number of shares traded over the period (millions) 72.7 84.3 Total value traded over the period (€ millions) 6,699.2 6,543.8 Average number of shares traded per month (thousands) 6,059 7,028 Average value traded per month (€ millions) 558.3 545.3 Total number of shares in capital (period- end, in millions) 212.7 212.2 Total number of shares in free float (period- end, in millions) (a) 104.9 104.1

(a) At the end of the period and in accordance with the definition of free float used by the NYSE Euronext Paris Indices Steering Committee.

194 THALES — 2017 Registration Document Stock market information and financial communication — Company and share capital

4.4.1.3.3 Chart and comments on the change in price and volumes traded from 1 January 2017 to 31 December 2017

• CHANGE IN SHARE PRICE AND TRADED VOLUMES FROM 1 JANUARY 2017 TO 31 DECEMBER 2017

(price in euros) (volumes)

115 1,400,000

Share price closing CAC Next 20 +12.8% High: €99.5 CAC 40 +9.3% 105 1,200,000

95 1,000,000

85 Thales –2.4%

Share price closing 75 Low: €84.0 600,000

65 400,000

55 200,000

Closing price at Closing price at 30/12/16: €92.13 31/12/17: €89.88

January February March April May June July August September October November December

Comments on share price in 2016 and 2017 4.4.1.4 Dividend policy During 2017, the Thales share price fluctuated around €92, • Dividends are paid to the holders of shares in accordance with the law. ending the year slightly down (- 2.44%) from the start of the year, The Company uses the Euroclear direct payment procedure. underperforming against the CAC 40 and CAC Next 20 indices, which were up +9.3% and +12.8%, respectively. The Board of Directors’ meeting held on 5 March 2018 proposed applying a distribution rate equivalent to 37.7% of adjusted net In 2016, the Thales share price continued to increase, • income. overperforming against the CAC 40 and CAC Next 20 indices, which were up 7.5% and 3.6%, respectively. A proposal will therefore be put forward at the Thales Annual General Meeting on 23 May 2018 to pay a dividend of €1.75 per share for Comments on traded volumes in 2016 and 2017 2017, entirely in cash. As an interim dividend of €0.45 per share was paid in December 2017, the amount to be paid after the Annual In 2017, with close to 73 million shares traded, volumes remained • General Meeting will relate to the balance of the dividend for 2017 of high, despite pulling back from 2016 levels (down 15%). Daily €1.30 per share. traded volumes reached an average of almost 285,134 shares. The volumes traded experienced occasional increases during the year: As required by law, the per- share dividend information for the last three typically, at the time of announcement of the annual and interim financial years is given below. In accordance with the French General results but also with a peak the day after the announcement of the Tax Code (Article 158- 3, point 2), dividends paid in respect of 2014, acquisition offer made on Gemalto (close to 1.3 million shares). 2015 and 2016 qualified for a possible tax credit. • In 2016, with over 84 million shares traded, volumes remained high, despite pulling back from 2015 levels (down 16%). Daily • DIVIDENDS PAID FOR THE PAST THREE YEARS traded volumes reached an average of almost 331,000 shares. Traded volumes experienced one-off increases throughout the year: (in euros) 2017 2016 2015 2014 typically, when the annual and half- year results were announced. restated (a) Dividend before tax credit 1.75 1.60 1.36 1.12 4

(a) Subject to the approval of the Annual General Meeting of 23 May 2018, which will vote on the 2017 financial statements. The ex- dividend date will be 30 May 2018 and the payment date will be 1 June 2018.

2017 Registration Document — THALES 195 Company and share capital — Stock market information and financial communication

4.4.2 Financial communication policy

4.4.2.1 General overview 4.4.2.3 Contacts

Thales’ policy is to provide its shareholders with regular, clear and Investor Relations department transparent information, in compliance with the financial reporting rules Tour Carpe Diem and practices applicable to listed companies. 31. Place des Corolles – CS 20001 In addition to this Registration Document submitted to the French 92098 Paris- La Défense – France financial markets authority (AMF), which includes details of all the Tel.: +33 1 57 77 89 02 consolidated financial statements and associated analysis, business e- mail: [email protected] activities and results by business segment, the main statutory information about the Company and its corporate responsibility policy, Thales also publishes an interim report and a letter to shareholders as well as 4.4.2.4 Annual information regular press releases. Other publications include a corporate activity document: key information report with key information about the Group, a corporate social responsibility report and a social report providing a detailed description for shareholders of its commitments and achievements in these areas. This section lists information published in the 12 months preceding the All Thales information documents, presentations and financial press filing of this Registration Document, pursuant to the provisions of Article releases are available on the Thales website at www.thalesgroup.com. 221- 1- 1 of the AMF General Regulations. Thales also holds briefings for the financial community, by Thales’ Articles of Association and financial information about the teleconference where appropriate, particularly when announcing results Group are publicly available from its website (www.thalesgroup.com). (annual and interim financial statements and quarterly information) or important strategic or financial operations. 2016 full year results Regular meetings between Thales executives and institutional investors In the “Investor” section, under the heading “Publications /Releases are held in Europe and North America, typically as part of roadshows, & publications”: Capital Markets Days or visits to operational sites. These include a more detailed presentation of the Group’s business activities and • press release – 28 February 2017: 2016 full- year results; strategy. • presentation – 28 February 2017: 2016 full- year results; consolidated financial statements at 31 December 2016. Thales also regularly exchanges information on its corporate social • responsibility policy with the Socially Responsible Investor (SRI) Quarterly information at 31 March 2017 community. These reports cover corporate, social, environmental, governance and international trade issues, especially regarding In the “Investor” section, under the heading “Publications /Releases anti-corruption measures and the control over the export of defence & publications”: equipment and technologies or dual- use goods and technologies. • press release – 3 May 2017: orders and sales at 31 March 2017; Finally, Thales also maintains an ongoing dialogue with international • presentation – 3 May 2017: orders and sales at 31 March 2017. financial analysts and institutional investors to provide them with information about the Group’s business activities and strategy. 2017 Annual General Meeting of Shareholders In the “Investor” section, under the heading “Retail Investors /Annual 4.4.2.2 Provisional financial General Meeting”: reporting calendar • meeting notice – Balo (French Legal Gazette) – 10 March 2017; • total number of shares and voting rights as of the date of the meeting for 2018 notice – Article R. 225- 73- 1; • correction to meeting notice – 20 March 2017 BALO (French Legal 3 May Q1 2018 financial information Gazette); 23 May Annual General Meeting • translation in English of draft resolutions (for convenience only) 30 May 2017 ex- dividend date (21 April 2017); 1 June Payment of 2017 dividend balance • convening notice – AGM 17 May 2017; 20 July 2018 interim consolidated results • 2016 Registration Document; 18 October Q3 2018 financial information • availability of background documents (Article R. 225-83) – AGM 17 May 2017; • parent company social audit report & opinion of workers’ council (in French only); • legal certificate related to remunerations (in French only); • legal certificate and information related to patronage and sponsorship (in French only); • AGM 17 May 2017 – slideshow; • AGM 17 May 2017 – quorum and vote results; • AGM 17 May 2017 – press release.

196 THALES — 2017 Registration Document Stock market information and financial communication — Company and share capital

2017 first-half results Merger agreement between Thales and Gemalto of 17 December 2017 including a cash tender In the “Investor” section, under the heading “Publications /Releases offer on all Gemalto shares & publications”: In the “Investor” section, under the heading “Publications /Releases press release – 26 July 2017: 2017 first- half results; • & publications”: • presentation – 26 July 2017: 2017 first- half results; • consolidated financial statements at 30 June 2017. • press Release – 17 December 2017

Quarterly information at 30 September 2017 2017 full year results In the “Investor” section, under the heading “Publications /Releases In the “Investor” section, under the heading “Publications /Releases & publications”: & publications”: • press release – 19 October 2017: orders and sales at • press release – 6 March 2018: 2017 full- year results; 30 September 2017; • presentation – 6 March 2018: 2017 full- year results; • presentation – 19 October 2017: orders and sales at • consolidated financial statements at 31 December 2017. 30 September 2017.

4.4.3 Other market securities at 31 December 2017

4.4.3.1 Bonds maturing in 2018, variable rate), in order to refinance the €600 million bond that matured 2021 and 2023 in April 2013. In May 2016, Thales issued a €600 million bond at a fixed rate of In March 2013, Thales issued a €800 million bond, structured in the 0.75% (including €400 million swapped to variable rate). This bond is form of a five- year €500 million tranche with a coupon of 1.625% listed on the Paris stock exchange and matures in June 2023. It was (including €300 million swapped to variable rate) and an eight-year issued to refinance the €600 million bond that matured in €300 million tranche with a coupon of 2.25% (entirely swapped to October 2016.

4

2017 Registration Document — THALES 197 CORPORATE RESPONSIBILITY 5

198 THALES — 2017 Registration Document 5.1 HUMAN RESSOURCES INFORMATION 200

5.1.1 A responsible employment policy 200 5.1.2 High- quality social dialogue 204 5.1.3 Support for professional development 205 5.1.4 A group employee profit- sharing policy 208 5.1.5 A safe and healthy work environment: workplace health and safety 210 5.1.6 Gender equality and diversity 212

5.2 ENVIRONMENTAL INFORMATION 217

5.2.1 General policy on environmental issues 217 5.2.2 Pollution and waste management 221 5.2.3 Circular economy 221 5.2.4 Fighting climate change 223 5.2.5 Protection of biodiversity 225 5.2.6 Solutions to support the environment 226 5.2.7 Environmental indicators 229 5.2.8 Environmental reporting rules 230

5.3 SOCIAL INFORMATION 231

5.3.1 Territorial, economic and social impact of the Group’s activities 231 5.3.2 Fair business practices 232 5.3.3 Relations between Thales and its stakeholders 233 5.3.4 Societal indicators 239

5.4 REPORT BY THE INDEPENDENT THIRD PARTY ON THE CONSOLIDATED HUMAN RESOURCES, ENVIRONMENTAL AND SOCIAL INFORMATION INCLUDED IN THE MANAGEMENT REPORT 240

5.5 TABLE OF RECONCILIATION (ARTICLES L. 225-102-1 AND R. 225-105-1 OF THE FRENCH COMMERCIAL CODE) 242 5

2017 Registration Document — THALES 199 Corporate responsibility — Social information

5.1 HUMAN RESSOURCES INFORMATION

Aware that its success depends on innovation, expertise, and collective Based on the conviction that innovation comes from a cross- disciplinary performance, Thales has chosen to invest in sustainable and responsible approach and profile diversity, during the year the Group also relations with its employees. developed its policy in favour of diversity and inclusion, in particular through the deployment of mentoring and co-development programmes The Group’s long- term strategic vision “Ambition 10”, the principles of and awareness-raising actions. In this area, a communication which were defined in 2013, places employees at the heart of the campaign aimed at combating stereotypes and unconscious bias was Group’s long- term growth plan. rolled out across the Group. This strategic vision is based on a talent development policy capable of This momentum contributes to the Group’s Corporate Social Responsibility attracting, developing and retaining the best talent, to support the (CSR) initiative, which, since 2014, has involved executives in the Group’s digital transformation, and to promote and deploy a leadership highest levels of responsibility thanks to a specific CSR objective, taken model as well as a culture of diversity and inclusion which measures up into account when determining their variable compensation. to the challenges that must be met by the Group. Thanks to more than 15 years of initiatives as part of its Corporate With cohesion and commitment playing a decisive role in the Group’s Responsibility Policy, in 2017 the Group came in on top in the ability to achieve its objectives, in 2017 Thales wanted to formalise Defence & Aerospace sector in the World version of the Dow Jones three sets of commitments towards its employees based around three Sustainability Index (DJSI), which lists top- performing companies unifying ideas: give everyone the opportunity to perform to their full according to economic, environmental and social criteria. potential, develop together in a changing world and be attentive to everyone. Through a participative initiative, the Group’s employees Thales signed the United Nations Global Compact in 2003 and were invited, during the second half of the year, to propose drivers and adheres to its ten principles relating to Human Rights and labour rights, initiatives aimed at ensuring the effectiveness of these commitments and which were inspired by the Universal Declaration of Human Rights and in doing so to work together to define Thales’s future identity. the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work. At the same time, Thales further developed its candidate attraction policy through measures aimed at boosting its visibility to young Implemented on the basis of the agreements and best practices that graduates on social networks, through more targeted content and the guarantee the Group’s responsible business conduct, these commitments use of dedicated applications. enabled Thales to achieve the “Global Compact Advanced” level in the differentiation programme of the United Nations Global Compact In terms of professional training, the digital transformation forms an beginning in 2012. integral part of the strategy of the Thales Learning Hub, Thales’s new university, which opened on 6 September 2017 and which promotes innovative teaching methods.

5.1.1 A responsible employment policy

With recognised technological expertise, a broad international presence, In comparison to the previous year, employees under Group a wealth of talents and skills and a long tradition of innovation in all its management increased in 2017 (65,118 versus 64,071 in 2016). In areas of operation, the Group has been in a position to rise to the addition, Thales recruited 4,708(2) employees during the year on challenges of a fast-changing world. The data for 2017 demonstrate open- ended employment contracts, demonstrating the Group’s hiring the stability of the Group’s social dimension. momentum and attractiveness.

5.1.1.1 Employment in the Group 5.1.1.1.1 Breakdown of employees worldwide The international footprint of the Group is one of the pillars of Thales’s The breakdown of the Thales group’s 65,118 employees (1) by geographic strategy, in line with its long- term development model. While the area and level of responsibility demonstrates: diversity of its geographical footprint exemplifies the Group’s international • its international footprint, with 30,296 employees (46.5% of total character, Europe remains its principal employment zone, representing workforce), working outside France at end- 2017; 52,460 active employees, or 80.6% of total workforce. France, Australia, Canada, India and Portugal recorded the highest growth in terms of its highly qualified workforce, 77.7% of whom hold a position • workforce. equivalent to engineer, specialist or manager; • the presence of women, who make up 23% of the global workforce; • the proportion of long-term jobs, i.e. open-ended contracts (97.8%); and • the volume of full- time jobs (93.4%).

(1) In this chapter, Thales uses the term “employee” to designate all active employees. (2) This figure does not include the 1,469 work-study contracts in 2017. Nor does it include the conversion of short-term employment agreements or apprenticeship agreements into open-ended employment contracts. In 2016, 4,844 employees were recruited on open- ended employment contracts.

200 THALES — 2017 Registration Document Social information — Corporate responsibility

(headcount at 31 December) 2016 2017

Major countries for the Group Germany 3,142 3,126 Australia 3,341 3,605 Canada 1,471 1,581 United States 3,017 3,010 Netherlands 1,683 1,691 United Kingdom 6,483 6,364 Rest of Europe Austria 315 297 Belgium 879 873 Denmark 112 108 Spain 1,029 1,062 Greece 31 40 Italy 2,639 2,649 Norway 217 215 Poland 268 289 Portugal 260 343 Romania 234 271 Switzerland 298 288 Other (a) 23 22 Emerging markets Algeria 31 30 South Africa 143 120 Saudi Arabia 596 551 Brazil 178 191 Chile 42 50 China- Hong Kong 523 606 South Korea 29 28 Egypt (b) (c) 149 India 263 385 Israel 87 86 Indonesia 21 20 Japan 52 44 Malaysia 71 49 Morocco 38 44 Mexico 328 286 Middle East (excluding Saudi Arabia) (c) (d) 696 738 Russia 24 21 Singapore 695 709 Taiwan 26 32 Thailand 12 21 Turkey 105 115 Other (a) 172 187 France France (e) 34,463 34,822 WORLD 64,071 65,118

(a) Other countries with fewer than twenty employees and permanent establishments: Algeria, Argentina, Azerbaijan, Bolivia, Colombia, Dominican Republic, Egypt, India, Israel, Kazakhstan, Kenya, Latvia, Panama, Peru, Turkmenistan, Qatar, Russia, Senegal, Sweden, Uzbekistan, Venezuela, Vietnam. (b) Thales’s workforce in Egypt was included in the Middle- East scope until 2016. (c) Thales’s workforce in these countries also includes the employees of permanent establishments belonging to Thales Communications & Security, one in Qatar and one in Egypt. (d) The Middle East includes: UAE, Lebanon, Oman, Pakistan, Qatar and Bahrain. (e) At 31 December 2017, the total workforce registered in France was 38,024. 5

2017 Registration Document — THALES 201 Corporate responsibility — Social information

The Group’s scope of consolidation changed slightly in 2017 due to acquisitions and disposals.

Operations Workforce included in or removed from the Group’s scope of consolidation

Acquisitions USA: acquisition of Guavus Inclusion of 250 employees UK: acquisition of Aveillant Ltd Inclusion of 19 employees

Disposals France: disposal of Thales Communications Removal of 80 employees from & Security’s ID business the Group’s scope of consolidation

5.1.1.1.2 Breakdown of active employees by operating segment

The breakdown of employees among Thales’s three operating segments remained broadly unchanged in 2017.

Defence & Security Aerospace Transport Others Total

2017 34,011 18,772 7,005 5,330 65,118 2016 33,282 18,741 6,812 5,236 64,071

5.1.1.1.3 Breakdown of employees 5.1.1.2 Recruitment by type of contract Thanks to an employment policy appropriate to its needs, and despite The majority of the Group’s employees have open- ended employment the slowdown in certain employment markets and necessary efforts contracts and work full-time. This trend is a major characteristic of Thales’s to adapt in certain countries, the Group recruited 7,233 employees workforce and applies to all of the countries where it does business. in 2017: 4,708 on open-ended employment contracts, 1,056 on Fully 97.8% of Group employees have open-ended employment short-term employment contracts and 1,469 on work- study contracts. contracts and 93.4% work full- time. Lastly, the use of temporary workers Recruitment therefore remained stable compared to 2016 (7,206). has remained relatively limited; in 2017, the Group used only 2,959 France, Australia, the United Kingdom, the United States and Canada temporary workers worldwide. In France, the Group’s companies used saw the most hires. A large majority of new hires were offered 925 temporary workers (786 in 2016). long- term employment. Between 1 January and 31 December 2017, the Group signed 1,469 5.1.1.1.4 Breakdown of employees work-study contracts, mainly in France, Canada, the United Kingdom by level of responsibility and China. This increase (from 1,407 contracts signed in 2016) illustrates the Group’s commitment to integrating young people into the Thales classifies all of its jobs throughout the world according to 12 workforce. levels of responsibility (LR), reflecting the skills and experience required, In France, of the 3,753 employees recruited in 2017 (3,834 at the complexity and importance of the objectives and the difficulties end-2016), a total of 2,119 were hired on open-ended employment associated with the working environment. Levels 1 to 6 of the contracts, 1,145 on work study contracts (770 apprenticeship contracts classification correspond to positions for operators, administrative staff, and 375 vocational training contracts) and 489 on short- term supervisors and technicians. Levels 7 to 12 include positions at levels employment contracts. equivalent to engineers, specialists or managers. At 31 December 2017, a total of 77.7% of Thales employees held a position equivalent to engineer, specialist or manager level (LR 7 to 12). 5.1.1.3 Departures

5.1.1.1.5 Breakdown of employees During 2017, a total of 5,263 employees left the Group. These by age bracket departures mainly comprised resignations (2,146), retirements (1,325), dismissals (897 across the board) and the expiry of short-term Thales, in common with peer groups in the sector, reports data related employment contracts (571). Excluding expired short-term contracts, the to length of service with the Company and average age, which are number of departures was 4,692 (versus 4,083 in 2016). relatively high but stable. Many employees remain with Thales throughout The proportion of redundancies for economic reasons (521) remained their career. stable compared to 2016, despite difficulties faced in some countries. Thales favours both the employment of older employees (36.1% of Redundancies in 2017 related primarily to a decline in business in employees are aged 50 and over) and the integration of young people some fields and the completion of a number of projects (mainly in the (34.1% of employees are under the age of 40). United Kingdom, the United States, and Germany). Countries that had to resort to economic redundancy adopted a series of measures (such In France, 35.9% of employees are aged 50 and over and 33.2% as transfers, support and outplacement) to limit the effect on employment. are under 40. The average age of employees was 45 at Some temporary external redeployment measures (temporary external 31 December 2017 (versus 44 at end-2016), while the average mobility) were implemented to limit the number of employees made seniority was 16 years. redundant for economic reasons. In France, the total number of departures, including expired short-term employment contracts, stood at 2,417, resulting mainly from retirements (1,038), resignations (589) and expired short- term contracts (397).

202 THALES — 2017 Registration Document Social information — Corporate responsibility

5.1.1.4 Candidate attraction policy Contests to boost attractiveness Aware that electronic and cyber security profiles are rare on the To support its growth worldwide, the Group is continuing and stepping employment market, Thales is continuing to take innovative action in up its search for new talent through global recruitment campaigns, with order to attract candidates with these areas of expertise. To this end, the the aim of hiring employees from a wide range of backgrounds in terms Group is involved in different events and challenges such as the “cyber of gender, training, experience and culture. Thales’s success and security challenge” (European Cyber Week) and “Project Arduino”. performance effectively depend on its ability to attract top talent from a variety of labour markets (both in France and abroad) and on the Now in its fifth consecutive year, Project Arduino invites engineering commitment of its employees. students from around the world to put their skills to the test by developing an innovative project linked to Thales and its areas of business using an Arduino kit (printed circuit board with a programmable 5.1.1.4.1 Continuity of the Group’s microcontroller). The aim of the initiative is to increase awareness of the employer brand Thales employer brand and boost the Group’s appeal with a view to attracting new talent. Unveiled in 2014, the Group’s employer brand plays a key role in attracting new talent around the world and increasing diversity within Working in teams, students are given three weeks to complete their teams. The Global Resourcing function is responsible for enhancing project and submit a video presentation. Online voting by the general the Group’s attractiveness and recruiting the talent needed to deploy the public will determine which three teams will present their project before “Ambition 10” strategy. This function strengthens the Group’s ability to a panel of Thales employees, who selects the winning team. diversify its skills and helps to boost growth in its businesses by Already deployed in the United States, the United Kingdom, implementing strategies that improve awareness of Thales on social Singapore, France, the Netherlands, China and Hong Kong, several media and university campuses, and in major events such as the 2017 new countries (Portugal, Canada, UAE and Australia) took part in the edition of the Paris Air Show (Salon du Bourget). 2017 edition of Project Arduino. The Group has also developed its recruitment site to increase its visibility For the first time, “Girls on the Move”, the international version of the and make it easier for candidates from all countries to consult available “Elles Bougent” network, a French non-profit organisation with the role job offers. of encouraging young women to take up careers in science and The work carried out in 2017 to formalise the Group’s commitments technology, is acting as partner to the competition. towards its employees is also fully in line with Thales’s candidate attraction policy, as these commitments should help to meet existing 5.1.1.4.3 Thales and the professional employees’ expectations while also attracting new talent. integration of young people

5.1.1.4.2 Digital and social media As part of its Human Resources strategy, Thales has implemented a attractiveness recruitment policy for young people designed not only to respond to its hiring needs but also to help young people enter the workforce. As a With the internet now the number one source of information and job training method, work-study contracts are an important component for searches, in 2017 Thales continued to step up its presence on social Thales in integrating young people. In 2017, for example, the Group signed networks (LinkedIn, Twitter, Viadeo, Facebook, Instagram). At end-2017, 1,469 work-study contracts worldwide, notably in France (1,145), Canada the Group had more than 278,000 followers on LinkedIn. (112), the United Kingdom (94), and China (including Hong Kong) (37). Thales also increased its presence on sites specifically for young In France, at 31 December 2017, the Group’s companies included graduates (Jobteaser, l’Etudiant, Studyrama, Yupeek, Wizbii) and on 1,401 apprentices (770 of whom were hired during the year), 476 young generic job sites (Monster, RegionJob, Indeed), and advertised people on vocational training contracts (375 of whom were recruited opportunities within the Group through new sites such as Work4us and during the year) and 111 individuals with CIFRE fellowships (40 of SoNetJob. whom were recruited during the year). Thales renewed partnerships with several recruitment sites in late 2017 Continuing its programmes to promote young people’s integration into and, through the use of the Multiposting and eQuest solutions, now the workforce, Thales continued to show its commitment with the signature multicasts job vacancies to some 50 recruitment and social media sites. of a new agreement with the French government on the Development This approach, which is based on channels used the most by of Growth and Employment, which was entered into in July 2017 for a candidates, makes it easy for them to access information about the three-year term. In particular, this agreement provides for the number of Group, to read its latest news, to search for jobs and to apply online. A work-study students in France to be maintained at 5% of the average high number of applications are now received via social media, online annual workforce. recruitment sites and the Thales website. In France, these channels Under this agreement, the Group has committed to approximately account for nearly 70% of applications (or more than 135,000). 6,500 new hires during the period from 1 January 2016 to Thales has also developed innovative interactive interfaces to 31 December 2019, including 35% candidates aged under 30 on encourage people to learn about the Group. Available since open- ended contracts. Through this agreement, the Group has also mid- 2015, the new Thales mobile app allows users to find job undertaken to prioritise the recruitment of young people who have vacancies and recruitment events within the Group, as well as offering successfully completed a work-study programme within the Group, the opportunity to apply via smartphone. Deployed in all countries in where possible depending on vacancies. which Thales operates, the app helps to reinforce the Group’s employer To support young people at professional baccalaureate or BEP level, brand and presence on social media. currently on work-study programmes and who intend to remain Thales also provides the first virtual reality recruitment experience. This in education to access a higher level of qualification (BTS, DUT), the unique solution which relies on “HTC Vive” technology has been Group also granted 23 “Prix Thales Education” bursaries in deployed since June 2017 at recruitment forums and events attended by November 2017. the Group and offers potential candidates the opportunity to experience Each year, the Semaine de l’Industrie (Industry Week) is an opportunity and discover the Group’s business activities in an interactive way. for the Group’s French sites to host secondary school and university students. These visits, conducted in partnership with the non- profit organisation “Elles bougent”, are an opportunity to present the job roles and business activities carried out at Thales to young training students in the Group’s target schools, and also to spark the interest of young 5 female students in a career in the industry.

2017 Registration Document — THALES 203 Corporate responsibility — Social information

5.1.1.4.4 Educational partnerships In 2017, Thales’s companies in France repeated the “First Internship with and links with schools and students a Company” campaign in partnership with “Elles Bougent” As part of the campaign, internships were offered to young female Year-10 students to Students from schools and universities are all potential future Group allow them to discover various aspects of the Group’s business. employees. To help them all throughout their schooling and higher For the tenth year running, a number of Group sites also opened their education and facilitate their integration into the workforce, Thales has doors to contestants of the “Je filme le métier qui me plaît” youth film formed a number of partnerships with schools and universities in France contest of which Thales is a partner. and abroad, notably in Australia, the Netherlands, Germany, the United Kingdom and Romania. Our employees, our best ambassadors To strengthen Thales’s links with universities, in July 2017 the Group In France, the Group carried out around one hundred initiatives in brought together a considerable number of universities from ten schools in 2017 as well as took part in some 50 forums in schools and countries for the “Global Academics Partner” event. This event, which universities supported notably by an internal network of more than 100 was held over two days in the Paris region on the sites in Palaiseau Campus Managers. Former students from partner schools who are now (Research & Technology centre) and Gennevilliers (Thales Communications Group employees, Campus Managers act as Thales ambassadors with and Security), was devoted to the presentation of the Group’s students sharing their experiences to help them to make better career innovations in research and development and its commercial markets. It decisions and find out more about the Group’s various businesses. They was a platform for numerous discussions in particular regarding the represent essential links and ensure a close relationship between Group’s digital strategy, cyber security, the future of big data and educational establishments, students and the Group. Thales also artificial intelligence. The event also helped to strengthen collaboration encourages its employees to take part in events organised by their between the Group and the university sector and to further develop children’s schools to introduce the students to the various aspects of the partnerships focused on a mutual desire to develop future technology business. and talent. In 2017, Thales was also ranked the third most attractive employer for Promoting careers in science and technology students at engineering schools in France (Universum rankings) according to the same rankings, students from engineering schools ranked Thales as The Group is also keen to encourage an interest in science and technology the company which organised the “Best recruitment events” in 2017, careers among secondary school students. demonstrating the success of its candidate attraction policy.

5.1.2 High-quality social dialogue

In all areas of common interest, Thales promotes cooperation with its 5.1.2.1.2 Collective bargaining in France employees and their representatives, and provides them with high-quality information, in particular by supporting and encouraging In France, numerous Group agreements have been signed since 2006, employee relations. forming a basis that is common to all employees, whichever company they work for. This is the case, in particular, for (i) the Group Anticipation agreement, renewed in 2013, which articulates a shared 5.1.2.1 Collective bargaining and transparent approach to workforce and skills planning, (ii) the Group benefits agreement, which harmonises employee benefits, (iii) the Group framework agreement on professional gender equality 5.1.2.1.1 Collective bargaining around the world (framework agreement of 13 January 2004, amended by supplemental agreement on 27 June 2012), and (iv) the Group framework agreement At the end of 2017, a total of 86.3% of Thales group employees of 24 April 2015 on teleworking. worldwide were covered by collective agreements, including the European agreements signed by the Group. The companies in question Thales began a new round of collective bargaining in 2017, motivated can add locally negotiated agreements to this common framework. by the belief that this process contributes significantly to its economic More than 60 new collective agreements were signed in France in 2017, performance while helping to improve employee working conditions. In showing the importance and dynamism of social dialogue. 2017, five new structural agreements were signed at Group level in connection with this social dialogue: By involving employee representatives at a transnational level, Thales has endeavoured to strengthen social dialogue at European level since • The Group agreement on the Development of Growth and 2009. In June 2009, Thales thus signed its first European agreement Employment, dated 23 February 2017. This agreement establishes with the European Metalworkers’ Federation (EMF, now IndustriAll a set of measures on the following topics: European Trade Union) on Improving professional Development through – Social cohesion and solidarity: Effective Anticipation (IDEA). The IDEA agreement concerns more than One of the key provisions of the agreement is to extend the legal 50,000 employees and defines very specific objectives for improving framework allows for the allocation of rest days, the generalisation employees’ professional development, through some 20 or so programmes. of subrogation, the payment of a supplement to the daily parental The momentum created at European level by the IDEA agreement led to presence benefit for employees obliged to take leave for parental the April 2010 signing of a second European agreement with the EMF presence. on the Transparent annual Activity discussion for mutual Listening and developing professional Knowledge (TALK). The TALK agreement sets a clear framework and practical guidelines for conducting the Annual Activity Discussion. It defines basic principles to ensure that discussions are held in the best possible conditions and that the rights and responsibilities of all parties are respected.

204 THALES — 2017 Registration Document Social information — Corporate responsibility

– Organisation of working time and support for growth: 5.1.2.2 Appropriate social The agreement provides a framework for the ad hoc use of dialogue bodies atypical working time and provides the option to adjust the fixed number of days worked for employees in return for an increase in their basic salary. This measure is applicable on a voluntary basis 5.1.2.2.1 European Works Council and according to annual reversibility. Created by an anticipation agreement, the European Works Council Adaptation of Employment and Growth: – (EWC) comprises representatives from Thales’s 11 main European countries. The agreement establishes measures related to recruitment, the integration of young people into business, the retention of older It operates on the basis of: employee in employment and the passing on of knowledge and skills. • two ordinary Annual Plenary Meetings and further meetings convened • The Group agreement on incentives, dated 23 February 2017 which in exceptional circumstances; establishes a pooled incentive plan applicable to all employees of a Select committee that meets in order to ensure regular provision of the Group in France. • information; The Group agreement on the Time Savings Account, dated • information and discussion meetings on the strategic outlook at the 23 February 2017 which allows eligible employees, on a voluntary • level of each Group Global Business Unit (GBU). basis and through the investment of untaken leave or rest days and /or cash payments, to build up savings in the form of days In 2017, two ordinary plenary meetings, two extraordinary plenary which may in particular be used for the future funding of leave which meetings and four meetings of the European Works Council Select is unpaid in principle, or for a reduction in hours to part time. While committee were held. In addition, twelve information and discussion one of its main aims is to enable employees to pursue personal meetings took place as part of the work of the European Works projects, the time savings account is also a means of boosting Council, within the Group’s business activities, to discuss the strategic solidarity between the entities of the Group. Accordingly, for any and social perspectives of these activities with staff representatives. contribution made in time to an individual savings account, the Company will pay the equivalent of 10% of the rights saved within a 5.1.2.2.2 European Anticipation socially-responsible reserve, which may be used by any company of Commission / National anticipation the Group in the event of a short- term decrease in activity. Commissions / European Convention • The Group agreement on the organisation of negotiations in connection with the project to simplify the legal structures of the The European IDEA agreement stipulates that a European Anticipation Thales group in France dated 23 November 2017. This agreement Commission should be set up to conduct a forward-looking analysis of establishes the procedures for the organisation of negotiations job families and discuss the annual training priorities of Thales Learning aimed at standardisation of the collective statutes applicable to Hub. National anticipation Commissions have also been set up since employees as part of the project to simplify legal structures and to 2009 in the European countries covered by the IDEA agreement. These provide for the continued application, during these negotiations, of bodies play a vital role in anticipating changes in the various job the collective statute in force. families. • The Group agreement for people with disabilities dated 27 November 2017 formalised for the years 2018- 2019- 2020 5.1.2.2.3 Trade union coordination body is primarily intended to strengthen the different actions undertaken at Group level in France by the Group for the development of work-study programmes and the retention in employment of people with disabilities. The Group has set up a body to coordinate representative trade unions at Group level in France. In addition to acting as the interface between In addition to carrying out compulsory annual negotiations, the Group’s the Group and the trade unions present in each of its companies, this French subsidiaries also signed several agreements in 2017. The main body is responsible for addressing all negotiations with Group-wide areas of negotiation were: gender equality, implementation of impact and ensuring agreements are rolled out within the relevant teleworking, and the adaptation of Active Employment Management companies. All Group agreements implemented in Thales companies in measures at the relevant companies. In addition, as part of the project France have been entered into within this framework. to simplify the Group’s legal structures, transition agreements were entered into aimed at maintaining the collective agreements in force in absorbed companies for a specific period. 5.1.2.2.4 Group Works Council in France

The Thales group Works Council was created in 2000 as the result of an agreement whose provisions were revisited in conjunction with all the trade unions in 2011. The 30- member Group Works Council is a body for information, deliberation and discussion aimed at developing dialogue between corporate management and employee representatives on the position and strategic focuses of the Group’s main areas of business. It is also consulted annually on Thales group-level strategic focuses. The Group Works Council met three times in plenary sessions in 2017.

5.1.3 Support for professional development

Thales believes that the individual development of each employee is in its ability, firstly, to predict key changes or innovations and to prepare necessary for the Group’s success as a whole. In a constantly changing action plans to deal with them, and secondly, to train and support every economic and technological environment, the Group’s professional employee with a view to diversifying their experience, providing them development policy relies, in particular, on forward planning, and results with opportunities and thus designing a better career path. 5

2017 Registration Document — THALES 205 Corporate responsibility — Social information

5.1.3.1 Management Each job family works on its own transformation in accordance with of job families new demands from the Group’s customers and markets, the adaptation to widespread development of digital technology in the content specific to job roles or in the processes related to the activities of the job family Thales has identified fifteen generic job families of equal importance for (tools, methodologies, information exchange flows, user experience, etc.) the Group’s success. The architecture of these job families worldwide to offer employees a shared vision of these changes and service offers to has been fundamentally adjusted to meet ongoing changes in the better support these changes (training, innovation, coaching, etc.). Group’s markets and to better enhance employees’ skills. Each job family is managed at the highest level and benefits from the expertise of an The Group’s framework is regularly adapted to take into account changes operational leader and an operational committee, an HR contact person in certain job families. and a training support team to anticipate changes and future trends, as well as to put forward a collective professional development action plan (covering recruitment, training, job roles to be developed, etc.).

• THE VARIOUS JOB FAMILIES

FP01 FP06_0x R&D: Software FP11 Management FP06_1x R&D: IS/IT & cyber-security Finance

FP02 FP07 FP12 Strategy, marketing and sales Client service Human Resources

FP03 FP08 Quality Assurance FP13 Bids & projects management & Customer Satisfaction Legal & Contracts

FP04 R&D: System engineering FP09 FP14 & General research Purchases Communications

FP15 Real Estate, HSE, FP05 FP10 Security, Management R&D: Hardware Industry Support Services, Workplace Medical & Welfare services

Management of key and critical skills 5.1.3.2 Anticipation to help In a highly competitive economic environment, employees’ technical safeguard career paths skills are a major advantage. Skills management provides substantial leverage in terms of professional development. To this end, the Group The forward- planning process, supported by negotiations with the has developed a “skills management” approach for its key job families Group’s French and European social partners, contributes to the success (R&D, Industry, Customer Services), centred on the identification and of the job families’ management mechanisms. It guides Thales’s social sharing of available technical skills. This approach, which relies on an policy in Europe, with strong involvement from three players: inventory and assessment of skills, helps to anticipate operational the employer, who chooses to share job- related information and requirements, provides practical responses to issues identified in • actions in an effort to improve transparency and makes that programmes or helps to form new teams thereby securing bids and information available to employees along with support mechanisms projects. It also favours the implementation of tailored development and online tools to facilitate the construction of their career plans; actions to meet operational requirements and gives managers the opportunity to anticipate needs and to ensure their teams’ key skills are • the employee, who becomes an active participant in his or her up to date, through better alignment with the agreed professional development through new and significant involvement, and who development plans (covering skills transfer, coaching, training and may benefit from a detailed, real- time understanding of the recruitment of specific profiles). development of his or her job family within the Group, as well as from ongoing access to all of the mechanisms and tools in place; At end-2017, nearly 28,000 employees worldwide had already listed their skills using the tool, which is continuously being improved. • employee representatives, who, having a greater awareness of future developments in the job families, are well versed in these Management of specialists analysis methods and voice their opinion on the short- , medium- and long- term action plans put forward. Thales’s technological innovation relies largely on a community of specialists /experts. The Group recognises their contribution at all levels The Group has recognised the fundamental role played by employee of responsibility and within each job family. Thus, at a comparable level representatives in setting up a forward- planning policy for changes of responsibility, specialists / experts and managers are treated in an within the various job families and job roles. In France, the Group identical way based on a two- tier career development scale collective agreement of 23 April 2013, which has a term of five years, implemented at international level. Lateral mobility is encouraged. forms part of the approach instigated by the agreement of 23 November 2006 aimed at developing workforce and skills planning. It also defines the conditions, procedure and measures associated with Active Employment Management in the event of foreseeable economic difficulties linked to new skills requirements, or in the case of technological breakthroughs that could have an impact on employment under certain job families.

206 THALES — 2017 Registration Document Social information — Corporate responsibility

Joint efforts by the Company and employees resulted in the International mobility implementation of Active Employment Management in the companies The Group has implemented several processes to encourage international Thales Electron Devices and Thales Services in 2017, after their staff mobility: representatives had been informed of and consulted on the economic projections, the effects on employment and the timeliness of implementing • the International Business Volunteers (V.I.E.) programme in 2017 the initiative. allowed more than 75 young people aged between 18 and 28 from the European Economic Area to go on assignments of 6 to 24 months in a foreign country; 5.1.3.3 The employee as active • the “Career Plus” programme, which has now absorbed the participant in his or her “Career 1st” initiative, matches operational needs with the desire of professional development employees of all kinds aspiring to temporary international mobility. At end- December 2017, 112 employees on “Career Plus” were enrolled in this programme; Thales believes that all employees should be active participants in their own career development plan. An analysis of the changes in job • the launch in 2017 of the e- JET (Job Exchange within Thales) families and job roles and communication of the corresponding results initiative contributes to developing the Group’s international culture enables each employee to construct a career plan in step with while also attracting and retaining new talent. This programme thus developments and the associated skills requirements in his or her field. gives new recruits, with more than two years’ experience in their job, the opportunity to go on an exchange to a similar job abroad The Group also ensures that its employees receive a professional for a period of 6 to 12 months. Thanks to a mobile application development discussion each year. This individual discussion is an developed to identify these exchanges, four employees have important step in the process of professional development and already benefited from this experience; constitutes a special opportunity for employees to take stock with their manager of how best to grow in their current role and to define their • other international secondments are dependent on the Group’s career path. This meeting also provides employees and managers with strategy and the needs expressed by the countries of operation. the opportunity to jointly define an action plan that includes training as Thanks to these initiatives, at 31 December 2017, at total of 755 well as any other initiatives aimed at professional development. During Group employees (coming from 28 countries of origin to 65 destination their professional development discussion each year, employees are countries) were on international mobility assignments, in all business informed by their line manager of trends in their job family and their job sectors. role, and resources that could contribute to their professional development. International mobility postings are spread across every region of the In 2017, a total of 88.4% of Thales’s employees worldwide had a world, with 26% in the Middle East, 24% in the Europe, 19% in professional development discussion with their manager (compared to Asia-Pacific, 16% in North and South America, and 15% in the rest of 91.4% in 2016). the world. Participating employees were primarily from Europe, Thales also makes computer tools available to its employees in the form especially France (66%), with smaller numbers from Asia-Pacific of applications that they can use to list and update their experience, (Singapore, Australia, etc.), North America as well as some emerging skills and requests for professional development (e- HR Together), to look economies. at job offers on the internal job board, to submit their CVs online via the In particular, these programmes should contribute to the achievement of application portal (e- HR Staffing), to see the training sessions that have the Group’s objectives in terms of diversity. been validated and to enrol themselves for available sessions (e-HR Training). Career Corners have also been set up at many sites in France and the rest of Europe in order to provide a forum for information and 5.1.3.5 Training discussion, where employees can meet with HR professionals and experts and receive individualised advice on career planning. Thales’s commitment to training stems from the view that building a successful career path means maintaining every employee’s expertise at all times, as a guarantee of employability. The Group’s training policy 5.1.3.4 Mobility and career paths has a dual aim: meeting the needs of the Group’s companies by implementing Faced with increasingly competitive markets, employee mobility and • growth and performance improvement projects and supporting the professional development increase the Group’s ability to adapt to future Group’s transformation; changes and to offer rich and varied career paths to employees. Active career management is thus encouraged. • taking into account employees’ individual aspirations in terms of skills development with regard to their job or professional mobility. Mobility also offers the opportunity to increase skills in a matrix organisation within which the “market” vision must fit in with the Key training figures for 2017 “product” vision of the Global Business Units. The Group’s employees completed 18.5 hours on average of training in Professional mobility is integral to each job family and business segment 2017, with 77.4% completing at least one training course. Overall, a to strengthen and enhance skills. In addition, career gateways (from total of 1,177,692 training hours were received Group- wide in 2017. one job family to another, from one job role to another within the same job family, and/ or from one establishment to another) are identified by In France, the number of training hours per employee (20.08 hours) the job family list applicable to the Group as a whole. remained the same. The amount of spending on training has increased and stands at 3.98% of payroll versus 3.58% in 2016. Facilitating the geographical mobility of employees is also a key issue. The Group has taken steps to help employees in this process, in particular by harmonising support measures in each of the European countries. Thales guarantees each employee access to information about job vacancies on a confidential basis in the context of internal mobility. In France, common rules have been defined to facilitate the process, whether for assistance with a change in position or a geographical relocation or both, covering relocation, help with finding housing, a moving bonus, etc. In 2017, a total of 1,054 employees relocated in France as part of a geographical mobility programme. 5

2017 Registration Document — THALES 207 Corporate responsibility — Social information

Thales Learning Hub: “to share knowledge Training programmes to meet the needs and transform Thales” of the Group and its employees Present in ten countries (1) (representing approximately 90% of total In France, since 2007 training has been organised through a shared workforce), Thales Learning Hub (formerly Thales University) contributes training service in order to: to employees’ professional development in the various countries where create a combined organisation to serve the Group’s companies, the Group operates, while ensuring a common culture that reinforces • with a joint team providing advice, administrative processes and cohesion around the Group’s key values. homogeneous shared tools. This helps to optimise training purchases The concept of the Thales Learning Hub, founded in July 2017 to and financing, and centralise the securing of subsidies; coincide with the move of the Thales University campus in Jouy-en- Josas position the companies’ priorities and key Group issues around to the Hélios site (Vélizy), embodies a training approach based on • major topics such as the definition of training guidelines, key actions learning, meeting, sharing, facilitation and active participation for all and the creation of training plans; employees. It therefore increases the importance of “Thales enseigne Thales” (Thales teaches Thales) and the idea that every employee, with • develop expertise in training advice at the most local level in support their abundance of knowledge, contributes to the development of their of the Group’s entities for the implementation of training plans for the colleagues and the Group in general. benefit of employees and their professional development. The purpose of Thales Learning Hub is to enable employees to adapt their individual and collective skills to changing job roles, while supporting the Group’s strategic goals. For several years now, the 5.1.3.6 Development of Group training body has therefore been requested to provide support in a leadership model the roll-out of key transformation programmes: the Group’s long-term strategic vision, “Ambition 10” and its operational offshoot, “Ambition In 2014, the Group promoted a new leadership model. Developed in Boost”. In 2017, more than 91,000 hours of digital training were collaboration with managers, this new leadership model defines the delivered worldwide (an increase of 12.3% compared to 2016). The professional behaviour expected of leaders. It comprises six key skills (2) international digital portal was used by more than 27,600 employees which are described through desirable and undesirable types of in 2017, i.e. an increase of 20% compared to 2016. behaviour. One of the six key skills “Cooperate to succeed” was used as a guiding principle when setting the objectives of Group managers In France, 14,645 employees took part in training at Thales Learning in strategic roles. Hub in 2017, versus 14,203 in 2016. The number of training hours delivered by Thales Learning Hub in 2017 in France stood at 220,360 Written and published in several languages (French, English, German hours (compared to 218,198 hours in 2016). Thales Learning Hub and Chinese), the presentation for this model was disseminated in all therefore provides more than 31% of the training hours in France. the Group’s major countries. As it stands, the vast majority of managers have been made aware of this model either through attendance-based In 2017, efforts to develop the training offer continued with the workshops, through modules integrated into Thales Learning Hub introduction of new multimodal programmes comprising a range of training sessions, or through participation in local initiatives. The training different teaching methods and provided in the Thales Learning Hub programmes for management delivered through Thales Learning Hub international portal. The training offer was also enhanced through a have been adapted based on the six key skills described in this model. continued focus on social learning and training in the field (engineering forums, international mentoring programmes and case studies based on Actions aimed at developing talents based on the leadership model have real- life situations). been taken since 2015 in all the major countries where the Group operates in order to prepare future leaders: 360° questionnaires, In the digital field, new teaching methods were developed and offered development centres, project team charter, etc. At the end of 2017, more to employees: “Learning Channels” such as those created for the than 2,100 Group leaders had received a 360° questionnaire debriefing Welcome Convention and TDAYS (periodic meetings for the Group’s based on the leadership model. Since the implementation of this new Top management), digital learning communities and the participation of leadership model, more than 1,600 leaders have had the opportunity to Thales Learning Hub in the implementation of the first Small Private complete a development programme. The leadership model is now Online Course (SPOC) in collaboration with the Engineering integrated into the majority of the Group’s HR processes (personnel review, Department. professional development discussion, recruitment, induction) and In terms of innovation, in 2017 Thales Learning Hub launched the systematically incorporated into all collective development initiatives. “Quick Apply” service aimed at strengthening the principle of A self-perception questionnaire was also made available to all Group “co- creation” of digital content with the support of the operational employees in their form for the professional development discussion, departments (rapid video recording made available to employees, helping them to become aware of their strengths and their areas for development of “digital capsules”). development. Through these initiatives, Thales Learning Hub contributes to the Since 2016, a platform for sharing best practices was also emergence of a “learning organization”, where all employees can play implemented based on the leadership model. Thanks to this platform, a more active role in their training and professional development. initiatives from around the world were shared, thereby spreading the leadership model further throughout the Group. A specific initiative, called “Team- Up!” was also rolled out in 2016, with the aim of creating team engagement and enthusiasm for the “Ambition 10” objectives and improving their collective efficiency. Thales’s Executive Committee was the first team to test the initiative, working on their collective leadership through a variety of questionnaires. Throughout 2016, most of the Group’s top- level teams (Executive Committee, Global Business Units and Management Committee) took part, helping more than 300 people to improve their leadership skills. Since its launch, 80 management teams representing more than 900 people across the world have had the opportunity to benefit from this initiative.

(1) Germany, France, Italy, the Netherlands, the United Kingdom, Canada, the United States, the United Arab Emirates, Australia and Singapore. (2) Managing complexity, acting with responsibility and ambition, succeeding through cooperation, influencing key players, engaging and developing teams, and displaying emotional intelligence.

208 THALES — 2017 Registration Document Social information — Corporate responsibility

5.1.4 A group employee profit-sharing policy

An integral component of its employment policy, the Group’s salary 2000, the compensation and benefits policy applied in all Group policy combines collective results and individual performance. Its companies has also included a global variable compensation plan for implementation process is based on transparency, equity and dialogue. employees in a position with a level of responsibility of 8 to 12, which defines a target rate of variable pay for each level of responsibility. This An Annual Activity Discussion is held at the beginning of the year variable compensation plan aims to recognise the individual results of between managers and each member of their teams. An ideal time to the employees concerned (60% of the amount of variable compensation define individual objectives for the year and place them in the context depends on the level of achievement of the annual individual targets and of the team’s collective objectives, the Annual Activity Discussion is also the ongoing goals for the role), to encourage teamwork and to give an opportunity to discuss the appraisal of the results achieved over the team members a stake in the business results of the Group and the past year. Worldwide, 93.7% of employees took part in such a Company to which they belong, as assessed by indicators. discussion in 2017 (94.6% in 2016). In 2017, compensation rose by over 2.4% in France. This increase includes both individual pay rises and, for the employees concerned, 5.1.4.1 Compensation the collective pay rises negotiated with the trade unions. and salary progression Payroll, including profit- sharing and incentives (excluding Naval Group) totalled €6,292 million in 2017, compared with €6,025 million in Individual pay rises depend on fulfilment of responsibilities, achievement 2016. The €267 million increase in payroll from 2016 to 2017 of annual targets, market positioning and allocated budget. Since includes a negative foreign exchange rate effect of €51 million.

(in € millions) 2016 2017

France 3,414 3,628 Europe excluding France 1,492 1,486 USA, Canada, Australia 831 874 Rest of world 288 304 TOTAL 6,025 6,292

Note: the changes in payroll in France shown in this table differ from the progression in average compensation of the headcount because it takes into account changes in headcount and its structure and changes in the age pyramid, as well as developments in profit- sharing and incentive schemes.

5.1.4.2 Incentives and 5.1.4.3 Group employee profit-sharing in France savings schemes

In order to strengthen the loyalty of employees beyond their local entity The Group’s employee savings schemes are made up of a Group and solidarity among the Group’s French entities, in 2004 entities in the savings scheme (PEG) set up in France in 1998 and, since 2007, a country entered into a pooled profit-sharing agreement. The amount of collective retirement savings plan (PERCO). the global profit- sharing reserve distributed in 2017 for financial year 2016 At 31 December 2017, the total savings under management by Group amounted to €50.8 million (compared with €34.8 in 2016 for 2015). schemes amounted to €1,082 million (compared with €995 million at Independently of their participation in the pooled profit-sharing end- 2016), held by 57,200 former and current Group employees. agreement, in 2017 a total of 22 of the Group’s companies in France paid, in accordance with their incentive agreement, incentive rights for 5.1.4.3.1 Group savings scheme (PEG) financial year 2016, totalling €38.5 million (the amount paid in 2016 and employee shareholding for 2015 incentives was €45.2 million). Incentives are intended to involve employees in the company’s results and performance. At the end of 2017, assets under management in the Group savings The parent company paid €3.96 million in incentives in 2017 for 2016 scheme (PEG) stood at around €718 million, including €352 million compared with €4.1 million paid in 2016 for 2015. excluding the employee shareholding fund. Under the Group savings scheme, the employee shareholding fund is the main framework within which Group employees hold company shares. Set up for the employee share offer in 1998, the fund holds shares acquired during the offers in 2000, 2002, 2004, 2008, 2011, 2013, 2015 and 2017. At 31 December 2017, assets under management amounted to approximately €366 million, consisting of Thales company shares managed within the PEG on behalf of around 31,300 shareholders.

5

2017 Registration Document — THALES 209 Corporate responsibility — Social information

Including shares from free share plans, employee shareholding in 5.1.4.4 Allotment of free shares Thales amounted to 2.91% of the Company’s share capital at and “phantom shares” 31 December 2017. subject to performance 5.1.4.3.2 Collective retirement savings plan conditions in France (PERCO) On 28 September 2017, Thales’s Board of Directors approved a plan Set up in 2007, the collective retirement savings plan (PERCO) gives to allot free shares, all subject to performance conditions, to 764 employees the opportunity to set aside savings for their retirement with French senior executives. the Company’s help. By supplemental agreement dated A plan to allot “phantom shares” (monetary equivalent of a Thales 29 March 2011, the parties to the original PERCO agreement changed share), all subject to performance conditions, was also put in place for the plan to significantly increase the amount of corporate assistance in 307 non- French senior executives. the event of voluntary payments. A total of 1,071 employees in 27 of the Group’s host countries took part At 31 December 2017, assets under management as part of the PERCO in these two plans. plan amounted to €364 million, on behalf of 34,300 beneficiaries (compared with €308 million on behalf of 32,600 beneficiaries in 2016). Short- and medium- term incentive schemes lasting between two and three years have also been introduced for technicians, engineers and managers.

5.1.5 A safe and healthy work environment: workplace health and safety

One of the Group’s key priorities is to provide a safe and healthy work and implementation of avoidance and tailored protection measures, environment for all employees, in compliance with applicable law, by etc.) and in the context of operations carried out (industrial processes, monitoring procedures, preventing health and occupational risks and substances, external sites, etc.). training employees. Thales is committed to a deliberate, responsible approach to prevention 5.1.5.2 A key priority: prevention and protection for the safety of the Group’s employees. This commitment, included within its ethical principles, has been a driver for and employee training the Group for over 15 years and is reflected in a policy to reduce health and safety impacts and risks in its various activities worldwide, in its With health and safety one of the Group’s key priorities, for many years products and at the various levels of the organisation. Thales has conducted regular analyses and updates of environmental risks to keep pace with changes in its business activities, scientific and Independently of ensuring compliance with applicable regulations and technical developments and emerging challenges. anticipating future regulatory changes, this deliberate policy has two key areas of focus in terms of health and safety: This analysis, formalised through risk mapping, is intended to: • providing a safe and healthy working environment for its employees, • check the conformity of business activities and products used or on its own premises and on external sites; placed on the market; • design, purchase, produce and provide solutions, products and • ensure that employees are not exposed to specific risks; services which meet health, safety and environmental requirements. • monitor that business activities are not likely to affect the environment through technological accidents; 5.1.5.1 A dedicated organisation • analyse and anticipate the impact of new regulations. Risk mapping consolidates an overview of areas for improvement, The Group has established a global organisation designed to prevent which are addressed via action plans both at Group level and locally. risks related to workplace health and safety, whether at Thales sites or Coordinated by the Risk Assessment Committee, the process to manage external sites, and to manage major health crises that could occur these risks likely to affect employees is monitored regularly. internationally. Finally, international Health and Safety Steering Committees ensure Within the Group, the Human Resources and Health, Safety and coordination of these policies. Environment Departments share the vast domain of health and safety (H&S). In collaboration with the Group’s medical coordinator, they To underpin the Group’s skills in health and safety matters, dedicated define the H&S strategy, policy and processes. They coordinate good training modules are also advertised in the Thales Learning Hub practices, and associated frameworks, rolled out in the different brochure. As well as health and safety managers, these modules target countries in accordance with the national legislation and constraints. the different job families: purchasing, design, operational managers, They also take concrete actions in terms of prevention, health and safety etc. in the workplace by taking into account the situation of each of the Thanks to these initiatives, in 2017, Thales pursued its programmes with entities as regards regulatory compliance, workstation risk analysis, a view to instilling a real “safety culture” by through the introduction of training and awareness plans, equipment maintenance, operational manager involvement. control and technological risks, as well as exercises in relation to emergency scenarios. Finally, as part of its deployment of certified management systems, at 31 December 2017 the Group recorded 107 OHSAS18001 certificates With a view to constantly improving its performance in terms of health, representing 82% of the worldwide workforce. safety, and risk prevention, thanks to a network of “Health and Safety site /operations” coordinators in each country and entity, the Group has put in place a global organisation to ensure deployment of prevention measures on sites (exposure and protection of employees, risk analysis

210 THALES — 2017 Registration Document Social information — Corporate responsibility

• CHANGE IN NUMBER OF EMPLOYEES 5.1.5.4 Information on WORKING AT OHSAS 18001 SITES work-related accidents 2013 65% and absenteeism 2014 72% Worldwide, the Group’s overall absenteeism rate is 2.54%. 2015 76% In France, the total rate of absenteeism calculated in accordance with 2016 81% the social report was 3.25% in 2017. This rate has been relatively 2017 82% unchanged for the last few years (3.27% in 2016, 3.18% in 2015). The absenteeism rate, excluding parental leave, also remained unchanged at 2.57%. The proportion of absenteeism relating to accidents at work, 5.1.5.3 Tangible measures commuting accidents and occupational illnesses was similar to the proportion recorded in the previous year and remained consistently low. and procedures For accidents at work, the overall frequency rate worldwide was 2.19 in 2017 and the severity rate was 0.05. The rates differ substantially for Practical measures in relation to employee health and safety in the each country, depending in particular on the activities taking place workplace are also implemented by the Group’s Human Resources there. In France, in 2017, the frequency rate of accidents at work was Department and Health, Safety and Environment Department, specifically 2.56 and the severity rate was 0.08. in relation to quality of life at work. Accordingly, in France, the “quality of life at work” agreement of • CHANGE IN FREQUENCY RATE 4 February 2014 defined a general framework for Thales’s health and (WORKING DAYS LOST DUE TO ACCIDENTS AT WORK) safety policy and established a system for identifying and preventing occupational risks. The agreement is based on a preventive approach 2013 2.53% involving all players in occupational health. It is aimed at preventing the 2014 2.34% appearance of psychosocial risks (PSR) by paying particular attention to primary prevention, through the formalisation of actions to prevent their 2015 2.33% appearance, thanks to a unique risk assessment document for each 2016 2.15% establishment. 2017 2.19% As the agreement of 4 February 2014 expired in 2017, negotiations were initiated in September 2017 with a view to concluding a new • CHANGE IN SEVERITY RATE Group agreement on “quality of life at work”. To raise employee awareness of the importance of factoring quality of 2013 0.069% life at work into their daily activities, most Group companies in France 2014 0.077% now organise an annual “quality of life at work” Week, during which employees can attend a number of workshops and conferences in 2015 0.062% areas such as workplace well-being, the prevention of PSR and 2016 0.049% cardiovascular risks, balanced diets and sleep. 2017 0.055% Tangible measures have also been taken to make it easier for employees to reconcile professional and personal obligations, including It should be noted that the inherent difficulty in defining the concept of the creation of inter- company crèches and concierge services. occupational illness in the countries has not allowed this information to In 2017, a total of 328 management-level employees received training be consolidated across all countries in which the Group is established. in psychosocial risks from Thales Learning Hub. The information on occupational illness is consequently shown only for France. In France, 1,637 working days were lost due to occupational The Group framework agreement of 24 April 2015 on teleworking, illness in 2017. which has since been supplemented by company agreements, is fully in line with this commitment to improve quality of life at work. Lastly, a central “quality of life at work” committee supports all of these 5.1.5.5 Solid welfare cover initiatives. Offering employees quality health and death/ disability coverage helps To increase employees’ health and safety, as part of the annual Health, to support them throughout their working lives. Some countries have Safety and Environment campaign, an awareness raising initiative on brought in specific measures in this regard. In France, since the road safety was rolled out to all Group sites. During the campaign, a conclusion of the Group agreement on welfare provisions on series of posters was presented and distributed to employees to 23 November 2006, employees have had a harmonised collective highlight the main dangers and train them in good habits to help to status across all companies and identical welfare cover, whatever the reduce risks. legal entity concerned. Internal and external audits on working conditions are also conducted The agreement of 12 December 2016 adapted this system to reflect on Group sites and external sites abroad. The Corporate Health, Safety regulatory changes. and Environment team carries out similar assessments thanks to a team of 23 qualified auditors who conducted various assignments in 2017 in several countries (India, Hong Kong, Middle East, Portugal, Norway, United Kingdom, Spain, Italy, Mexico, France, etc.). This coincided with the actions taken to develop tools to contribute to safety management on external sites and project management. Finally, the rollout of the LEAN culture continues within the Group with the integration of workstation cleanliness / safety. 5

2017 Registration Document — THALES 211 Corporate responsibility — Social information

5.1.5.6 Working time Many Group employees work on the basis of 40 hours per week. For example, Belgium, Spain, Italy, Norway, Austria, South Africa, the For the Group, the organisation of working time should allow a Netherlands, Poland, Portugal, Switzerland and China (including Hong balance between work and personal life, with each country adapting Kong) operate a 40-hour week. In certain countries, the working week working time according to the applicable legislation, regulations and is shorter than this, pursuant to legal or contractual provisions. In the agreements. United Kingdom, most of Thales’s activities are organised on the basis of a 37-hour working week. In Germany, branch collective agreements A total of 93.4% of Group employees are full-time; part- time contracts give a working time of 35, 38 or 40 hours per week, depending on generally reflect the employee’s choice. the region. In France, most of the Group’s companies have signed A total of 93.4% of Group employees are covered by working time agreements implementing the 2000 framework agreement on working regulations, which in several countries (such as France, Spain, time which, for non-managerial staff, provides for working time of 35 Germany and the Netherlands) result from collective agreements limiting hours per week on average over the year, with reduced working time working time. In all, 77.7% of Group employees are of a level days granted; for managerial staff, it provides for a flat-rate system in equivalent to engineer, specialist or manager, which means that few hours or days over the year based on 210 working days a year employees are subject to unconventional working hours (nights, (excluding the country’s “solidarity day”). alternating shifts, etc.). The total amount of overtime worked in France was equal to 49,183 hours in 2017, as compared with 45,970 in 2016.

5.1.6 Gender equality and diversity

The commitments made by the Group and formalised in its Code of This initiative, specifically targeting women in the Group, is a real Ethics demonstrate its determination to act responsibly and fight all springboard into positions of responsibility. forms of discrimination. In addition, with the support of the Diversity Board and Thales Learning Accordingly, the Group is particularly committed to promoting an Hub, an awareness raising module in diversity and inclusion for all inclusive approach, making everyone feel fulfilled in their roles without employees was developed. Various sessions in this module were held in discrimination with respect to origins, gender, age, sexual orientation, 2017 in France and further afield, including in Singapore, Australia, the political opinions, religion, union membership or disability. United States, India and several European countries. One of the objectives of the Group’s “Ambition 10” strategic visions is to This section includes the elements of the Group’s policy on professional build a global, diversified company. equality and equal pay as provided in Article L225-37- 1 of the French Commercial Code. In early 2016, the Group’s Chairman announced ambitious commitments for the following years in terms of percentage of women hires (40%), access for women to positions of senior responsibility (30%) and the presence of at least three women on each management 5.1.6.1 Action to promote equality committee. The Group has maintained its commitment to ensuring that women are To adapt its organisation to reflect this commitment to becoming a more even more involved in its development, based on a committed, diverse and inclusive company and structure itself to implement the concrete policy supported by constructive social dialogue. The positive related objective, the Group created a dedicated Governance system changes seen in recent years attest to the Group’s commitment in this in 2016, comprising: domain. As a result, at 31 December 2017, women made up 23% of the total workforce, 23.1% of the European workforce and 24.4% of • a Steering Committee made up of the members of the Group’s employees in France. Within the Group, women are predominantly Executive Committee and chaired by the Chairman and CEO. The employed in long-term, highly skilled positions. In all, 96.8% of women Steering Committee is responsible for defining the Group’s Diversity employees worked under open-ended employment contracts, and 67.1% strategy, approving the allocated resources and promoting and (as compared with 60.5% in 2013) held positions at a level equivalent to monitoring the fulfilment of any commitments made to this end; engineer, specialist or manager (levels of responsibility 7 to 12). • a Diversity Board comprising members who are representative of the Group’s various departments. The Diversity Board is primarily 5.1.6.1.1 Commitments responsible for raising collective awareness of the concepts of inclusion, bias and stereotyping through mentoring and sponsorship The Group has long been committed to proactively making advances initiatives and the deployment of programmes to give tangible form with regard to professional equality. In 2004 in France, Thales took to Group- level commitments. decisive action in this area, in cooperation with the representative trade In addition, the governance system draws on existing networks such as unions (action plans were negotiated that were prepared on the basis the professional development network, the Recruitment network, the of comparative situation reports). In Europe, the IDEA agreement signed Gender Equality working group and Thales Learning Hub to ensure in 2009 brought commitments in all areas of gender equality: information on initiatives taken within the organisation is cascaded recruitment, career development, equal compensation, and work-life down extensively throughout the Company. balance. Since 2016, several actions have been taken at the initiative of the Since 2014, the Group’s corporate management has clearly reaffirmed Diversity Board such as the development of a Mentoring programme its commitment to promoting gender equality at all levels of which gave 28 women in important positions in the Group in Europe responsibility. To this end, specific action plans were devised involving the opportunity to receive support and advice from a mentor to all the Company’s stakeholders (Executive Committee, managers, contribute to their personal and professional development, as well as Human Resources, and employees). A dedicated organisation was set various internal and external surveys which were conducted on the state up in many countries, and exchanges of best practices were organised of diversity and inclusion within Thales. In addition, a communication at Group level. Lastly, goals in terms of women’s career development campaign was rolled out in 2017 across all of the Group’s sites to and /or recruitment were set in some countries, as well as in a number combat stereotypes and unconscious biases and to make all employees of Group companies. aware of the challenges linked to diversity and inclusion.

212 THALES — 2017 Registration Document Social information — Corporate responsibility

5.1.6.1.2 Concrete action 5.1.6.2 Diversity and inclusion

Recruitment: Steps taken to promote recruitment resulted in Group • 5.1.6.2.1 Promoting cultural diversity companies hiring 1,243 women on open-ended contracts in 2017. This brought the percentage of women among all new recruits on As an international group, Thales respects and encourages a range of open-ended contracts to 26.4%, compared with 25.7% in 2016. In cultures in the workplace. In the context of an increasingly globalised France, women accounted for 26.3% of total new hires on employment market, cultural diversity has emerged as a source of open- ended contracts. wealth and contributes to the Group’s strength. The Group pays Measures have also been taken to hire women on short- term and particular attention to the recruitment of employees in the countries work- study contracts to balance out the special emphasis on where it is present. recruitment through open-ended contracts. In all, 2,214 women In France, following on from the “Intergenerational Agreement”, the were hired at Thales in 2017 representing 30.6% of new recruits agreement on the Development of Growth and Employment signed on worldwide, 31.8% in Europe and 33.3% in France. Data relating to 23 February 2017 continues to promote equal opportunities, in the recruitment of women reflect the firm commitment made by some particular through the development of partnerships with partner countries, including Brazil (where women made up 40.4% of new organisations and schools and participation in recruitment forums on recruits), Mexico (36.7%), Portugal (36.6%) and Poland (36%). diversity organised by the public authorities. Thales also continued its partnership with Elles Bougent, a French Within Thales Alenia Space in France, managers who recruited employees non-profit organisation that encourages young women to take up of foreign nationality (16.3% of recruitments in the company in 2017) careers in science and technology. At end-2017, Thales had 218 were offered support through a training session on inter- culturalism. Elles Bougent sponsors (a figure which continues to rise) within its workforce who offer advice to young women choosing a career In the Netherlands, the target of achieving a proportion of 5% recruitments path. 2017 was a particularly active year in terms of events, through of non-nationals out of all recruitments made in 2017 was exceeded, which Thales took the opportunity make its contribution to young with the achievement of 6% in 2017. participants. Launched in March to coincide with International In the United Kingdom, Thales became involved, in partnership with the Women’s Day, the “Girls on the move” initiative, which aims to youth charity Prince’s trust, in several “Get Into” programmes, aimed at extend the action of Elles Bougent and its partners beyond France, helping young people aged between 16 and 25 who are out of the gave rise to the organisation, within Thales, of awareness raising schooling system or the job market to gain skills and experience to actions, workshops and site visits for the benefit of young female enable them to access or return to work. Currently being rolled out, the primary and secondary school pupils and students in Germany, aim of this initiative is to enable the recruitment within Thales of 30% of China and the United Kingdom. The event “Elles s’envolent au the young people supported through the programmes, and the return of Bourget”, organised on 22 June 2017, was an opportunity for 150 50% of them to an educational course, training or volunteering. female secondary school pupils and students to make an unprecedented visit to the event, accompanied by six Thales women sponsors, offering them an insight into jobs in the Aerospace sector. 5.1.6.2.2 Fostering generational diversity • Career: Efforts to promote the career development of women In France, the Group’s desire to give fresh impetus to its efforts by employees were increased in 2017. Stereotype awareness sessions adopting innovative measures to boost employment of over-fifties led to were conducted for more than 123 managers throughout the Group the conclusion in 2009 of an agreement on over- fifties employment in in France, bringing the number of managers attending such sessions the Thales group. This was followed in 2012 by a Group agreement since 2013 to more than 1,450. Co- development measures have known as the “Intergenerational Agreement” which expired in been taken in Europe to encourage the promotion of women. Since December 2016. The provisions from this agreement were however 2014, 339 female employees have taken part in personal reworked to a large extent in the “agreement on the Development of development sessions aimed at furthering their career development. Growth and Employment” entered into in February 2017. The By the end of 2017, 22 female employees in Germany had been provisions of this agreement were intended to prevent any risk of age involved in a mentoring programme since the initiative’s launch in 2014. discrimination, to develop the skills of over- fifties, to improve their Thales encourages the creation of networks that promote gender working conditions and to take into consideration personal situations of equality in the workplace. In 2017, these networks were developed unsuitable work or difficult work situations. Quantifiable objectives were in France and abroad (Middle East and South Africa) and include also set, aimed at increasing the proportion of new recruits aged 55 more than 1,200 employees of the Group. and over to 2% of the total and increasing the proportion of employees aged 57 and over to 15% of the official workforce by February 2020. • Remuneration and promotion: Thales is vigilant in maintaining equality of treatment with respect to compensation. Since 2006, In application of the agreement on the Development of Growth and Thales has set aside an annual budget in France equal to 0.1% of Employment, the Group is also committed to continuing to develop payroll specifically dedicated to dealing with any unjustified gender mentoring programmes which, for a given period, pair experienced pay gaps and promoting women. In all, 960 women benefited from employees with new recruits or employees preparing to take on new this measure in 2017. The proportion of women promoted to the responsibilities. These programmes form an integral part of the Group’s highest levels of responsibility (10 to 12) represented 22.9% of all skills transfer policy. promotions at these levels compared with 19.5% the previous year. • Work /life balance: Thales is committed to supporting working parents 5.1.6.2.3 Disabled employment and improving employees’ work / life balance. In France, Thales has been around the world involved since 2010 in setting up inter-company crèches, which, at the end of 2017, looked after 359 children. Since 2014, Germany has also Regardless of the country in which they operate, the Group’s offered employees from one of its sites the opportunity to reserve companies make a point of complying with the legal requirements and places in a crèche located in Ditzingen, with eight places reserved all local regulations and recommendations designed to promote on average per month, and will now offer this service across all sites. disabled employment. In addition to this service for smaller children, Germany recently While some of these national regulatory frameworks are essentially developed a daily childcare concept for employees with school aimed at banning all forms of discrimination (the United Kingdom, the children during school holidays, based on the organisation of workshops Netherlands, Australia and Norway), others (Germany, Austria, Spain, also aimed at raising technological awareness. The Ditzingen site Italy and South Africa) contain an employment obligation, and was selected as the pilot for the launch of this initiative, which, if companies that do not fulfil the obligation are generally made to pay a successful, should be rolled out to all German sites. 5

2017 Registration Document — THALES 213 Corporate responsibility — Social information

specific contribution. In a different approach, some legislative systems development and integration of people with disabilities within the (Portugal) provide financial incentives to companies that adopt a policy Group. This entire approach led to the signature in 2017 of a new of recruiting people with disabilities. agreement notably providing for the recruitment of 140 people with disabilities between 2018 and 2020, as well as 260 interns and 50 Many Group companies based in various countries have also adopted young people on work- study contracts. a series of measures aimed at going beyond the legal requirements and promoting the employment of people with disabilities. One of the aims of this agreement is to implement the requirements of the AFNOR X 50- 783 “Organismes Handi-accueillants” (disability- friendly organisations) standard on all sites by the end of 2019. 5.1.6.2.4 Disabled employment in France At end-2017, 44 sites in France had undertaken initiatives in this area and 27 of them had confirmed their conformity. Thales has long had a Group taskforce on disabled employment in France, Mission Insertion, the Director of which leads a network of Thanks to this new agreement, Thales’s actions are clearly in line with its disability contacts for each labour pool. Disability Employment territorial policy for the training and employment of people with Commissions have also been formed within each company with 250 disabilities through four areas of focus: young people, supported or more employees. employment, professional reintegration and SME support. As a result of the deployment of multi-year Group agreements in Similarly, partnerships concluded with education authorities and France, concluded in 2004, 2007, 2011 and 2014 by unanimous universities were continued, in order to support young people with agreement of the trade unions, the overall employment rate for disabled disabilities in their studies and professional integration. Since 2016, people in the Group has continued to rise to REACh 6.33% in 2016, these partnerships have been included in France’s regional disabled compared with 5.9% at the end of 2015 and 5.1% in 2011. In 2017, employment plans (PRITH), the first of which was signed in the this rate stabilised thanks to efforts to recruit and retain people with Île- de- France region. disabilities. In addition, in 2017, the Group continued to strengthen the partnerships These results have been achieved thanks to the proactive policy forged in previous years with the GESAT network for sheltered and implemented by Thales for over 20 years. It reinforces the actions taken adapted employment to facilitate and enhance subcontracting to the to promote and facilitate the retention in employment, professional disability- friendly sector.

214 THALES — 2017 Registration Document Social information — Corporate responsibility

• SCOPE OF VERIFICATION OF QUANTITATIVE DATA

Indicator 2017 data Scope

GLOBAL WORKFORCE (a) AT 31 DECEMBER 2017 65,118 100%

Workforce by country Workforce France 34,822 100% Workforce Europe 52,460 100% Workforce excluding France 30,296 100%

Workforce by gender % of women 23.0% 98.4% % of men 77.0% 98.4% % of women in France 24.4% 100%

Workforce by type of contract % of permanent contracts 97.8% 98.4% % of full- time contracts 93.4% 98.4%

Workforce by age group <30 11.2% 98.4% 30- 39 22.9% 98.4% 40- 50 29.8% 98.4% >50 36.1% 98.4%

Workforce by level of responsibility (LR) LR 1-6 14,308 98.4% LR 7- 12 49,737 98.4% Number of temporary staff 2,959 98.5%

Departures by type Number of departures 5,263 98.5% % of resignations 40.8% 98.5% % of redundancies 17.0% 98.5% % of retirements 25.2% 98.5% % of expiries of short- term contracts 10.8% 98.5% % of other departures (including death) 6.2% 98.5%

Recruitment Total number of new recruits 7,233 98.5% Of which open- ended contracts 4,708 98.5% Of which short- term contracts 1,056 98.5% Of which work- study contracts 1,469 98.5% % of women 30.6% 98.5%

Training % of employees benefiting from an EDP (b) 88.4% 98.1% % of employees trained 77.4% 98.1% % of women trained 79.8% 98.0% Average number of hours of training per employee 18.5 97.9% Total number of hours of training 1,177,692 97.9% % of employees covered by a collective agreement 86.3% 98.4% % of employees covered by working time regulations 93.4% 98.4%

(a) Workforce shown corresponds to active workforce. (b) EDP: professional development discussion (Entretien de Développement Professionnel in French). 5

2017 Registration Document — THALES 215 Corporate responsibility — Social information

Indicator 2017 data Scope

Health and safety Overall absenteeism rate – World 2.54% 93.9% Total absenteeism rate – France (social report) excluding maternity / paternity leave 2.57% 100% Total absenteeism rate – France (social report) 3.25% 100% Severity rate of accidents at work – World 0.05% 98.5% Severity rate of accidents at work – France 0.08% 100% Frequency rate of accidents at work – World 2.19% 98.5% Frequency rate of accidents at work – France 2.56% 100% Number of days lost due to occupational illness in France 1,637 100%

Other Payroll – World (c) €6.292 billion 100% financial consolidation Employment rate of people with disabilities in France 6.3% Number of jobs created by GERIS in 2017 210 % of purchases from EU suppliers 71% % of purchases from suppliers in France 41% Volume of industrial subcontracting services in France €1.62 billion

(c) Excluding Naval Group.

Note on methodology

Social reporting method Scope

The social report provides detailed information on social data, social The definition of the companies taken into account for the purposes of policy and its impacts, practices and action that fall within the Group’s preparing the social report and the Registration Document was not social responsibility. It reflects Thales’s international dimension. The modified this year and is in accordance with the IFRS 10 and 11 information it contains sets out the position of the Thales group at financial consolidation standards. Workforce under Group management 31 December 2017. The social report is available to download from as at 31 December 2017 thus includes only the workforce of the Group’s website www.thalesgroup.com, in the “Commitments” section companies controlled by Thales within the meaning of Article L233-3 of under “Key corporate responsibility documents”. the French Commercial Code (Code de commerce), as well as companies meeting those criteria but below the threshold for financial consolidation. Organisation and methodology In addition, the Group’s scope of consolidation changed slightly in 2017 due to acquisitions (2). To ensure that the data collected are accurate and reliable, a dedicated organisational structure and suitable methodology have been Moreover, the scope of the social report is specified for each figure: for implemented. Thus, continuing the process initiated in 2011 with the greater transparency, the percentage of employees covered is stated for roll-out of the e- Social Responsibility Reporting computerised reporting all responses. For each item of quantitative data, the table of scope of tool, the information contained in the social report is approved by the verification of quantitative data provides the percentage of the country directors of Human Resources. These directors have to complete workforce covered. a qualitative and quantitative questionnaire covering indicators that, while satisfying current legislative requirements, are also based on the indicators proposed by the Global Reporting Initiative (1) or negotiated Details with social partners, particularly at European level. The data reported by each country are consolidated by the Group HR Department, which • Workforce under Group management as included in the Registration checks for consistency before drafting the report. Document comprises all employees in each country, regardless of their contract type (open-ended, short-term or full- or part- time). It does not take into account apprenticeships or vocational training

(1) The Global Reporting Initiative (GRI) is a non-profit organisation that is developing a common working framework for drafting sustainability reports. Founded in 1997, the GRI published an initial version of its guidelines in 1999. Companies’ adherence to this text is completely voluntary. (2) In the United States, acquisition of Guavus (250 employees), in the United Kingdom, acquisition of Aveillant Ltd (19 employees) and in France, disposal of the ID business of Thales Communications & Security (removal of 80 employees from the Group’s scope of consolidation).

216 THALES — 2017 Registration Document Environmental information — Corporate responsibility

contracts (however, the number of contracts entered into is given in These figures have been obtained by reconciling data entered in the the recruitment section), employees on unpaid leave, employees on HR and Environment Departments’ reporting tools. sick leave (of over three months), employees on parental leave, or • The overall absenteeism rate corresponds to the percentage of days employees on unworked notice periods as at 31 December of the lost for any reason, work- related or otherwise, relative to the number year in question. of days theoretically worked in the various countries. Authorised • The total number of new recruits includes the work-study contracts leave such as annual leave, sabbatical leave, parental leave and concluded in 2017, but does not include the conversion of short-term personal leave is excluded. employment contracts or apprenticeship contracts into open- ended • The total rate of absenteeism in France, calculated in accordance employment contracts during the year. Nor does it include the with the social report, corresponds to the percentage of days lost for conclusion of internship contracts, International Business Volunteer (VIE) any reason, work- related or otherwise, relative to the number of agreements or CIFRE Research Training Fellowships or the transition days theoretically worked. It includes authorised leave, parental from active to inactive employee status or vice versa. leave and leave for family events. • The total number of departures includes resignations, redundancies • The frequency rate represents the number of lost-time accidents at for economic reasons, other redundancies (data relating to mutually work over the course of the year, multiplied by 1,000,000 and agreed contract terminations are recorded in this category), divided by the number of hours theoretically worked during the year. retirements, deaths and other types of termination, as well as expiries of short- term employment contracts. • The severity rate represents the number of days lost due to accidents at work, multiplied by 1,000 and divided by the number of hours Data relating to absenteeism and rates of frequency and severity of • theoretically worked during the year. accidents at work are calculated with reference to a number of days theoretically worked within countries, and based on active headcount • The employment rate for workers with disabilities corresponds to the and paid inactive employees (employees with a long-term illness do overall number of beneficiary units (disabled workers and use of not therefore fall within the scope of calculation of this indicator). subcontracting from the disability- friendly sector).

5.2 ENVIRONMENTAL INFORMATION

5.2.1 General policy on environmental issues

5.2.1.1 Long- standing • fostering a spirit of innovation with regard to the environment: – by sharing expertise, commitments – by communicating transparently, – by encouraging the involvement of employees, suppliers and Thales is committed to a deliberate, responsible approach to protection other stakeholders. of the environment. This commitment, written into the Code of Ethics, has been a driver for the Group for over 15 years and is reflected in a To reinforce its commitment, the Group has set performance targets for policy to reduce environmental impacts and risks in its various activities all of its entities since 2007. Five years ago, these were extended to worldwide, in its products and at the various levels of the organisation. purchasers, and to staff involved in product policy and engineering, industry and projects. In addition to ensuring compliance with applicable regulations and anticipating future regulatory changes, the policy has four key areas of focus: The current goals have been set for the period 2015-2018 and relate to energy, climate, waste, environmental management of the supply chain preventing impacts on people and the environment from the Group’s • and product design, in line with the Group’s environmental challenges. activities: – by reducing and controlling environmental risks and impacts on The Group is also organised to manage the anticipated gradual health, replacement of hazardous substances banned for use which could result – by consuming fewer natural and energy resources, in obsolescence of our products. – by respecting biodiversity and cultural heritage; Finally, following on from previous actions, in particular those taken taking the environment into account in product policies and services: • during the COP 21 events in 2015, in signing the French Business – by limiting their environmental footprint whenever possible, Climate Pledge (1) (11 December 2017), Thales confirmed its desire and – by developing solutions that are beneficial for the environment, its commitments to combating climate change (for instance by mapping – by using the environment as a driver for innovation; direct and indirect emissions (scopes 1, 2 and 3), reducing its direct • significantly reducing our own carbon footprint, as well as that of emissions and by developing innovative products and services to help our clients and civil society: its customers to reduce their emissions, etc.). – by reducing emissions from our own operations, – by promoting low- carbon solutions;

(1) French Business Climate Pledge: on the eve of the One Planet Summit on 12 December 2017, 91 French companies of all sizes and from all sectors announced the signature of a shared commitment 5 to climate. Each of these companies put forward its actions as a committed player in the fight against global warming.

2017 Registration Document — THALES 217 Corporate responsibility — Environmental information

• GOALS FOR 2015- 2018

2018 target

Natural resources Energy consumption –3%

CO2 emissions Energy and substances (scopes 1 and 2) –5%

Non-hazardous waste Quantity per person –5% Recycling rates >60%

Responsible purchasing Evaluation of Class A and new suppliers 100% Training for new buyers 100%

Eco- design Environmental impact assessment for all new products 100% Training for Design Authority line managers 50%

Detailed values are given in the table in Section 5.2.7.

5.2.1.2 Commitment 5.2.1.2.2 Employee training and information from employees E-learning modules are available to educate Group employees on the basic aspects of environmental risk control, general themes such as 5.2.1.2.1 World organisation eco-responsibility or specific issues such as the REACh (Registration, Evaluation and Authorisation of Chemicals) regulation, the labelling Aiming to consistently improve its environmental performance and system for hazardous chemicals or climate change. prevent risks, the Group has set up an organisation that reflects its To support the environmental skills within the Group, other dedicated challenges. This Group Health Safety Environment Department is training modules are offered (Thales Learning Hub) which, as well as responsible for setting out strategy, policy, processes, methods and environmental managers, target the different job families: purchasing, associated standards, and for supervising and monitoring their design, sales, etc. In 2017, the training of purchasers continued (on top implementation across the Group as a whole, with global facilitation of: of the 1,058 already trained) in addition to modules for engineering • a network of “site /operations environment managers” at country and managers and product developers (35% on top of the 641 already entity level, responsible for the environmental aspects of sites trained prior to 2016) and those responsible for product policies, to (buildings, infrastructure, energy, etc.) and the operations performed ensure the environment is taken into account in their daily work. (industrial processes, substances, waste, external sites, etc.), The Group Health – Safety – Environment Department also attends bolstered by a real estate management network; various conventions in other business lines to present the HSE strategy, • a dedicated network of “products and services environment” challenges, individual roles in terms of HSE: supplier auditor managers in the Group Business Units and Business Lines in charge convention, Welcome Convention to welcome newcomers, product of integrating environmental aspects upstream of and during offer policy convention, engineering / industry hardware seminar, R&D days. and product development phases, supported by contacts in the Given that an environmental approach necessarily requires buy-in from cross-functional services (engineering, industry, purchasing, services, all employees, the aim is to keep a constant eye on this theme and take offers, projects, etc.). Its purpose is also to facilitate action to it into account in day- to-day business practices. Thales offers various anticipate and research appropriate alternative solutions to communication tools and forums for all employees, including a substances that are not recommended or prohibited. dedicated intranet, notices, competitions and events. At end- 2017, the “sites/ operations environment” network involved close A collaborative IT platform specifically for Group employees across the to 400 people and the “environment in product design” network world provides a forum for exchanging news and information about the around 200, either full- time or by sharing time with other assignments. Group. Members include personnel working in areas such as design, Given that the environmental risks and issues in the Group’s different communications, sites and operations, in addition to those involved business lines require employees with managerial or technical skills in directly in environmental management. environmental matters, the operational management relies on these networks which are seated within a dedicated job family to enhance their skills, determine the need for recruitment and training, predict future developments and share their expertise as part of a single community.

218 THALES — 2017 Registration Document Environmental information — Corporate responsibility

5.2.1.3 Relations 5.2.1.4 Management and with stakeholders prevention of environmental risks and pollution 5.2.1.3.1 Involving suppliers 5.2.1.4.1 Continuous improvement To extend its eco-responsible approach to all suppliers, Thales requires and prevention process the companies with which it works to sign the Purchasing and Corporate Responsibility Charter, a contractual document intended to Aware of its responsibility towards the environment, Thales has fully help them align their policies and internal processes with the principles integrated the control of environmental impacts and risks in its Group that Thales is committed to respecting. At end-2017, 12,700 supplier management system, which is available to all employees and in all sites around the world had committed to this charter. entities worldwide. Moreover, as part of the selection process, potential suppliers are requested to complete a self-assessment enabling them to measure the • EMPLOYEES WORKING AT ISO 14001 SITES maturity of their environmental management and commit to a process of continuous improvement. This self-assessment may subsequently be 2008 61% verified during supplier audits conducted by Thales, which may also 2010 75% lead to a request for an improvement plan, or even to Thales deciding to remove a supplier from its list if certain essential criteria are not met. 2012 80% To reinforce this approach, the Group Purchasing Department has set 2014 88% the target of assessing the environmental maturity of all of its new and 2017 89% class A suppliers at the end of 2018 (representing 80% of purchasing volumes). At end- 2017, 7500 supplier sites underwent this assessment; The Environmental Management System has been implemented at all 67% of the panel concerned were class A. sites as part of a dedicated process for ensuring the control and In the call for tenders phase, the environment is now included in the limitation of environmental risks and impacts of operational activities weighted criteria for supplier selection. (buildings, industrial base, equipment and sites), the supply chain (purchases, supplier audits) and products delivered (product policy, Thales has also maintained very close partnerships over many years design, bids, projects and services). with certain suppliers to work together on shared actions for progress. Integrated into the different processes governing the Group’s activities, it defines good practices and methodological guides, as well as 5.2.1.3.2 Relations with other stakeholders specifying the rules to be respected at all levels of the organisation. Thales is committed to communicating in a totally transparent way with It also defines the risk management and alert procedures in the event of local authorities, as well as with its local neighbours and civil society. an accident. Where there are particular operational requirements, sites will volunteer At end-2017, 124 Group entities were ISO 14001-certified, information on its business news and challenges, and also when certain representing 89% of the Group’s workforce. Of these sites, 86 were activities are going to be exceptionally noisy, when emissions have certified to ISO 14001:2015, which covers the management of exceeded the authorised threshold, or when a pollution incident occurs. environmental impacts of products among other things. Procedures are also in place to receive, deal with and communicate The planning of audits takes place on an annual basis. Audits are reports and requests swiftly. conducted by the internal audit teams (audit policy, maturity assessment) To meet the requirements of civil society, investors, rating agencies and as well as by external auditors for ISO 14001 certification or prevention clients, Thales provides its environmental data on its website and also visits. participates in reporting for the Carbon Disclosure Project and the Dow In addition, to provide support to the sites, the risk management Jones Sustainability Index. It is also possible to send questions to the software suite eHSE was adapted to changes in standards, particularly Group’s Environment Department using a dedicated e- mail address. in relation to taking into account challenges, stakeholder demands, risks In the course of its partnerships, particularly with schools, Thales and opportunities within environmental analysis and the effectiveness of promotes preservation of the environment through programs on climate actions and associated resources. change and natural resources, or by working with universities. 5.2.1.4.2 Risk mapping

Environmental risks are one of the risk factors that may have an impact on the Group’s financial position (see Section 1.1.2.1.4). For many years, Thales has conducted regular analyses and updates of environmental risks to keep pace with changes in its business activities, scientific and technical developments and emerging challenges. This analysis, integrated into a risk mapping, is intended to: • ensure the compliance of activities and products; • ensure that employees and local residents are not exposed to health and environmental risks; • check that activities do not present a threat to the environment; • analyse and anticipate the impact of new regulations, including on product design. 5

2017 Registration Document — THALES 219 Corporate responsibility — Environmental information

Risk mapping consolidates an overview of areas for improvement, water damage, etc.) liable to cause major accidents and severely which are addressed via action plans either at Group level or locally. disrupt the supply chain. The prevention visits conducted on 139 sites lead to recommendations aimed at reducing the probability of incidents Since 2007, the Group’s Risk Assessment Committee has overseen an and preventing their consequences. annual evaluation of the risk management system by each of the Group’s operational entities, leading if necessary to the development of Risks related to natural disasters and water stress (risks associated with an improvement plan in collaboration with Group experts. climate change) are also assessed (see Section 5.2.4.4). To enhance its risk analysis of Group sites, Thales has an active policy Management of environmental risks also encompasses disposals or of prevention engineering with an external partner. It aims to improve acquisitions of assets, in respect of which it is important to limit the type, the risk profile of industrial activities on strategic sites, thus limiting value and duration of any guarantees provided or risks acquired. potential damages (fire, natural events, pollution, machinery breakdown,

Materiality Industrial type Tertiary type Comments of impacts activities activities

Water Low (a) Insignificant (a) With the exception of an Australian industrial site for which this is consumption significant (see paragraph 5.2.3.1.1). Emissions Low (a) None Tertiary sites discharge their sanitary waste water into local authority in water networks like any other municipal resident. Industrial sites collect and process their waste water before discharge. Atmospheric emissions Insignificant (a) None Industrial activities emit very few atmospheric pollutants. Energy Low Insignificant Few energy-intensive processes. Alternative energy optimisation research consumption work and promoting the development of eco- efficient products. Greenhouse Moderate Moderate Contribution mainly to scope 3. gas emissions (scopes 1, 2 and 3) Production of Low Insignificant Selective sorting in place. non-hazardous waste Production of Low Insignificant Some particularities on industrial sites using hazardous substances hazardous waste or primarily producing WEEE (electronics industry). Collected and disposed of through authorised channels. Management of Low None Anticipation and qualification of industrial processes in accordance chemical products with regulatory timetables. (obsolescence) Soil pollution Moderate Insignificant Some sites with a legacy of historically polluted soils under management and controlled.

5.2.1.4.3 Accidents and site pollution The insurance and compensation policies for victims of accidents, including technological accidents for which the Group may be liable, Since 1998, the Group has also been engaged in an extensive cover all sites insured by the Group including the upper tier Seveso site. pollution risk assessment programme. Few sites have shown significant Risks arising from accidents (such as fire or pollution) are managed signs of contamination, and where contamination has been identified, locally, with the support of the concerned Corporate departments if it is usually due to earlier industrial activities. necessary. Accident prevention and management procedures, as well When available techniques allow, steps are taken to remove pollution as procedures for handling specific complaints, are in place for such even if this is not a regulatory requirement. The impact on the available cases. An accident reporting tool makes it possible to analyse environmental resources is then reduced to a minimum by preferring accidents that do occur and draw suitable lessons from them. In 2017, in situ treatment to transferring pollution to another site. The water table is 15 accidents occurred; they had no significant impact on health and the periodically monitored at industrial sites and sites located in industrial areas. environment as corrective measures were immediately taken. Only one Group site is a Seveso upper tier establishment. In addition to the preventive measures mentioned above and in Section 5.1.5 “A safe 5.2.1.5 Guarantees, provisions and healthy work environment”, a safety management system (including measures such as a major accident prevention policy, an internal and compensation emergency plan and risk assessment) is deployed and inspected once a year by the Regional Directorates of the Environment, Land- Use Thales was not cited in any environmental dispute that gave rise to Planning, and Housing (Direction régionale de l’environnement, de compensation in 2017, and only granted one generic guarantee in l’aménagement et du logement or DREAL) in relation to Seveso classifications. relation to the environment. At 31 December 2017, the amount of reserves for environmental contingencies at Group level was €5.7 million.

220 THALES — 2017 Registration Document Environmental information — Corporate responsibility

5.2.2 Pollution and waste management

5.2.2.1 Limiting discharges Consolidated wastewater discharges have fallen by 17% compared with 2012, as a result of ongoing plant optimisation and modernisation measures and wastewater recycling. 5.2.2.1.1 Industrial atmospheric discharges Some sites that are not connected to public networks discharge their In general, Thales’s activities do not generate atmospheric discharges, industrial wastewater into surface water, after treatment, in accordance except for those linked to site operation (in particular heating). A few with regulations, and with the approval of local authorities. sites discharge industrial atmospheric emissions which are channelled and treated where necessary (with filters, scrubbers, etc.) and regularly checked. This primarily relates to solvents. 5.2.2.2 Fighting pollution

5.2.2.1.2 Solvent discharges to the atmosphere 5.2.2.2.1 Noise

With the exception of the Mulwala propellant manufacturing plant in Noise is also a concern for Thales, despite the fact that its activities Australia, the use of solvents is mainly linked to isolated individual generate little in the way of noise pollution. Cooling systems are the activities such as paintwork detailing or small-capacity component most common sources of noise pollution, and precautions are taken to degreasing baths. The quantities used are therefore limited and it is limit noise levels associated with this equipment. Sound levels are difficult to measure atmospheric emissions as they are not channelled. checked periodically. The few sites where noise is a particular issue are equipped with acoustic attenuation systems, or only conduct 69 (out of 155) entities purchase solvents; three of these entities account noise-generating activities within specific time periods. The increasing for 89% of purchases. The Mulwala site alone accounts for 86% of use of computer simulations for pyrotechnic testing, for example, also purchases and 92% of discharges resulting from the manufacture of helps to reduce noise. propellants requiring a large quantity of solvents. It should be noted that several sites have stopped using solvents or 5.2.2.2.2 Odours replaced them with detergents. Thales’s activities do not generally generate odour, except for one entity 5.2.2.1.3 Industrial wastewater discharge where systems to capture atmospheric emissions have been installed and are regularly checked. The redevelopment under way at this site Thales’s activities generate little in the way of industrial wastewater: 91% will modernise the facility concerned and eliminate these odours. of wastewater is discharged from six sites, and 65% from the Mulwala, Australia site alone.

5.2.3 Circular economy

5.2.3.1 Sustainable use of resources The Group’s overall consumption is down 8% since 2012 confirming the collective efforts made by all sites (including the Mulwala site which For several years, Thales has been developing a specific strategy for alone accounts for 36% of the Group’s water consumption). These natural resources and has launched various schemes to help manage achievements are due to increased employee awareness and to and reduce consumption, including in relation to the energy efficiency widespread use of best practices. of buildings and industrial processes, optimisation of water use and the reuse of materials. To support these measures, it is crucial to raise 5.2.3.1.2 Consumption of raw materials employee awareness of best practices. Thales designs, develops and supplies equipment, systems and services 5.2.3.1.1 Water consumption in aeronautics, space, transport, security and defence. The raw materials consumed by Thales are natural resources (see Sections Water is a vital resource to be protected. Accordingly, since 2000, 5.2.3.1 and 5.2.3.3) and various materials used in the manufacture of Thales has been engaged in a far-reaching programme to reduce its products by Thales and its subcontractors. consumption by, among other things, dealing with leaks, centralising The search for new technologies and the design of new equipment the management of its networks, replacing water- intensive equipment, involve restricting the use of materials to cut down on size and mass optimising industrial processes and reusing water in industrial processes. and to facilitate dismantling (see Section 5.2.6), as well as replacing the most toxic substances for health and the environment. These 2012- 2015* 2015*- 2017 requirements are conveyed to suppliers of the equipment and components that Thales assembles at its sites. Water consumption (cubic metres) –11% 3% The manufacturing processes are also optimised to limit loss of materials * At constant scope of consolidation over the period. and amounts of discharge and waste. The process of additive manufacturing (also called 3D printing), for example, is now used by The increase in water consumption over the period 2015- 2017 is due Thales to manufacture parts in the space domain (opening of its new to one site which installed a geothermal facility pumping ground water Thales 3D Morocco site in Casablanca in 2017). Boasting a low at 12°C for process cooling (furnaces, test benches) which is entirely consumption of raw materials, this new technology also makes it easier returned to the natural environment. to repair parts. 5

2017 Registration Document — THALES 221 Corporate responsibility — Environmental information

The principle is based on the manufacture of parts, not by removing • CHANGE IN WASTE PRODUCTION material, but by adding successive layers of powder (metal, plastic) agglomerated by means of a laser or electron beam, solely in places 2012 3,083 177.4 12,573 where material is necessary. Thales thus produces monobloc antenna 2015 4,042 161.2 11,003 supports in aluminium. 2017 3,103 179.5 12,977 Thales has also reduced the use of materials such as wood, cardboard and plastic by limiting and reusing packaging either for supplies on Production of non-hazardous waste (excluding exceptional waste) (tonnes) Thales sites or for the transfer of equipment from one site to another and Production of hazardous waste (excluding exceptional waste) (tonnes) fully integrates the eco-design concept into the development of its new Ratio of non-hazardous waste per person products to reduce the environmental footprint of Thales and the (excluding exceptional waste) (kg/pers.) customers who use its products in all areas where it is technically and The increase in the production of non-hazardous waste in 2017 is economically viable,. thanks to a multi-year cycle for the disposal of process sludge and metals on the Mulwala site, and to multiple works on the sites 5.2.3.1.3 Energy consumption generating exceptional quantities which could not be segregated from those produced through the sites’ activities. Aware of the energy challenge, Thales sets goals to reduce energy As a result of measures taken since 2007, 83% of all waste (excluding consumption, which has declined even with production increases on exceptional waste) was recovered and 51% was recycled in 2017. the sites that consume the most energy (in 2017: increase in capacity, new facilities and / or site extension). To achieve this, various measures related to selective waste sorting, the search for recycling channels or optimum treatment channels and campaigns to change habits and behaviour (printing policy and reusing 2012- 2015* 2015*- 2017 cardboard and other packaging, for example) have been introduced. These measures are aimed at reducing waste production and Energy consumption (toe / €k) –7% 1% improving waste treatment. * At constant scope of consolidation over the period. For instance, the amount of waste paper and packaging fell by 9% and 2.5% respectively compared to 2012, with the Group increasingly • CHANGE IN ENERGY CONSUMPTION * adopting a digitisation policy.

2012 24 13.6 163 Certain Group sites reuse packaging either for procurement on Thales sites or to transfer equipment from one site to another. 2015 21 11.1 152 Hazardous waste has also been a specific target. Dedicated areas for 2017 22 10.1 154 collection and storage have helped to manage this type of waste prior to disposal. The quantity of such waste has decreased consistently since 2015. Total consumption (in thousands toe) Fossil consumption (in thousands toe) Ratio par sale (toe/€m) 5.2.3.2.2 Food waste

* At constant 2012 scope. Food services companies manage the corporate restaurants at the majority of Thales sites. It is therefore their responsibility to communicate To achieve this energy efficiency, various audits have been conducted about eating habits and food waste management which are strongly at some of the sites with the highest consumption. These have given rise encouraged to reduce food waste. to reduction programmes being rolled out at all Group sites. The actions taken are mainly connected to lighting, office equipment, heating, air At the few sites in charge of their own food services, communication conditioning and process- related equipment. Thales is redoubling its campaigns targeting employees have been carried out. efforts to manage parameters such as heating temperature, plant operating schedules and the replacement of energy-intensive equipment. 5.2.3.3 Land use At the same time, some Group entities have taken steps towards ISO 50001 certification for energy management systems. At end-2017, The Group considers environmental criteria when choosing locations for 33 entities were ISO 50001- certified, representing 26% of the Group’s its sites, looking at climate and geological risks, the impact of its workforce. activities on the human and natural environment, and land use. The The Group’s carbon footprint has also been reduced by restricting the objective is to optimise compatibility between the Group’s activities and use of fossil fuels (gas, fuel oil and coal), with their consumption in the environment. Some activities, such as pyrotechnics, require a relation to sales continuing to fall in 2017 (down 7% compared with specific site due to the risks they generate and need to be bounded by 2012). The percentage of electricity from renewable sources now extensive security areas and suitable geology. These areas account for represents 17% of electricity consumption. approximately 80% of areas occupied by the Group (two sites in Australia and one in France). However, steps are taken to enhance their ecological value either by promoting biodiversity or by converting them 5.2.3.2 Waste prevention into pasture or farm land. Due to their activity, the majority of other Group sites tend to be in industrial areas (53% of land area excluding and management pyrotechnics sites). Soil erosion is another factor taken into account, locally via impact studies 5.2.3.2.1 Preventing waste production; and associated control measures where required by the context. recycling, reusing, recovering and eliminating waste For the past 20 years, the Group has also been engaged in an extensive pollution risk assessment programme for soil and groundwater In view of its waste targets, Thales has sought to reduce the quantity of (See Section 5.2.1.4.3). Action and control plans are developed for this waste it produces since 2012, as well as the amount sent to landfill purpose. and recycling.

222 THALES — 2017 Registration Document Environmental information — Corporate responsibility

5.2.4 Fighting climate change

5.2.4.1 Commitment to climate of climate change for companies. In 2017, Thales’s rating remained A- for its “climate change” performance, confirming its position as one Climate change is a major challenge which Thales wishes to address in of the best- performing companies listed. a consistent manner by reducing its CO2 emissions at source, as well as by contributing to a better understanding of climate impacts and a reduction in its customers’ emissions and those of civil society, thanks to 5.2.4.2 Reduction of greenhouse its innovative solutions or through the design of eco- responsible solutions. gas emissions from Since 2015, to assert its commitment to combating climate change, operations Thales, along with a number of other large companies and international organisations, has signed the “Business Proposals for COP21 (1), the aim To measure its greenhouse gas emissions, for over 10 years Thales has of which is to confirm corporate commitments on climate. Thales has developed a methodology that is consistent with its operations and is also exhibited its innovative solutions to combat climate change at the based on the Greenhouse Gas Protocol created by the World Galerie des Solutions (solutions exhibition) in Paris in 2015, at the Resources Institute (WRI) and the World Business Council for COP22 in Marrakesh in 2016 and, through the signature of the French Sustainable Development (WBCSD). The main material sources Business Climate Pledge (2) (11 December 2017), the Group recently identified have been evaluated (see table below). Working methods confirmed its desire and commitments to combating climate change. are in place to evaluate other sources that could be material, such as Moreover, since 2005, Thales has chosen to communicate in a totally procurement of products and services and use of goods and services transparent way about its climate strategy to the Carbon Disclosure produced (see Section 5.2.4.3.1). Thanks to this, in 2017 the mapping Project (3), an association which aims to inform the investment decisions of emissions for scope 3 was completed and the reliability of methods made by its institutional members, by telling them about the consequences put in place was assessed. This work will continue in 2018.

2017 2016 2015 2012

Scope 1 (a) 85,563 81,870 87,720 96,845 Scope 2 (b) 136,114 134,372 136,451 153,312 Sub- total (1+2) 221,677 216,242 224,171 250,157 Business travel 77,355 80,898 79,012 81,238

TOTAL (in tonnes) 299,032 297,140 303,183 331,395 Use of products and services sold (c) 563,483

The Scopes combine CO2 emissions (calculated with emission factors from the GHG Protocol 2012) relating to: (a) Gas, coal, fuel oil, substances, mobile energy sources. (b) Electricity and steam. (c) Not included in the total as only part of the scope is covered.

In order to reduce its CO2 emissions, Thales is increasing efforts specifically high-voltage tests, has very high global warming potential. It is used by with regard to energy, substances and transportation. very few sites; those that do use it have implemented ambitious plans to reduce emissions, such as manufacturing tubes without using SF or Refurbishing and renovating certain buildings to higher ecological 6 modifying equipment using this gas. They have also rolled out training standards and changing equipment and consumption habits are all and awareness campaigns for employees concerned by the measures taken to improve energy efficiency and thereby help to environmental impact of SF and /or implemented specific monitoring of reduce direct CO emissions. Environmental criteria are incorporated in 6 2 incoming and outgoing SF by workshop. This helped reduce emissions the selection of buildings, new locations and equipment (architecture, 6 by 71% between 2012 and 2017. In 2017, SF only accounted for 11% materials, building management system, comfort, access, etc.), as is the 6 of CO emissions due to refrigerant fluids. case for the new Thales (parent company) head offices in Paris, Thales 2 Austria GmbH, Thales USA Inc and Thales Deutschland GmbH, which Thales is also increasing its initiatives to reduce emissions from business are certified compliant with the LEED and BREAM standards and where travel by making use of a travel policy, modern information energy performance has been optimised. The energy efficiency of technologies, carpooling, electric vehicles and travel diagnostics and industrial processes has also been optimised where possible. by highlighting the benefits of alternative means of transport to its employees and efficient communication tools. These initiatives led to a Along with energy, products with high global warming potential, used reduction in CO emissions of 4% and 26%, respectively, for company mainly in refrigeration systems, are subject to monitoring and reduction 2 vehicles and rental vehicles between 2015 and 2017. plans. Several sites have replaced a number of high- emission refrigerants with equipment containing lower- emission refrigerant fluids. Through its employment policy, Thales also promotes the development of solutions for smart solutions to promote carpooling, the use of public Particular attention is paid to sulphur hexafluoride (SF ). This gas, used 6 transport and cycling. in a specific industrial process to insulate electronic tubes during

(1) Business Proposals for COP21: proposals signed by 59 companies which committed to contributing to the low-carbon transition by demanding constructive dialogue between states and companies, a carbon price to be set, increased investments in the research of low- carbon solutions and a step up in R&D and innovation. (2) French Business Climate Pledge: on the eve of the One Planet Summit on 12 December 2017, 91 French companies of all sizes and from all sectors announced the signature of a shared commitment to climate. Each of these companies put forward its actions as a committed player in the fight against global warming. (3) Carbon Disclosure Project: an international non- profit organisation, which enables companies, cities, states and regions to measure and manage their environmental impacts, and 5 investors and policy- makers to make more informed decisions by explaining to them the consequences of climate change.

2017 Registration Document — THALES 223 Corporate responsibility — Environmental information

• AVERAGE VEHICLE CO2 EMISSIONS (G / KM) oxide) emissions, a 50% reduction in perceived noise and a green life cycle for products (design, manufacture, maintenance and Rental car disposal / recycling). 2008 202 In particular, Thales is leading a Clean Sky research initiative entitled 2017 133 “Systems for Green Operations” which should optimise aircraft fuel consumption by improving flight trajectories, in particular during the Company car take- off and approach phases. 2008 152 As part of Thales’s activities, changes in cockpits, electricity generation, 2017 131 simulators, air traffic and satellite communication are all stakeholders in these European studies. Paper-based studies and demonstrator parts have been carried out for theoretical assessments of potential gains. 5.2.4.3 Contribution to fighting Based on models developed by the aircraft manufacturer, the results can be used to estimate and test changes arising from this programme for CO2 climate change savings in the aircraft with new materials and software on board or on the ground to generate results for all of the programme’s stakeholders. 5.2.4.3.1 Innovative climate solutions SESAR In the air traffic sector, the European SESAR programme, in which Worldwide economic development, increasing urbanisation and Thales is a key player, should provide a response to the challenges changing lifestyles all have an impact on smart requirements in terms of posed by the doubling of air traffic and the tenfold improvement in flight travel, connectivity and resource management. At the same time, safety by 2020, while reducing the fuel consumption of commercial climate change has serious consequences for the planet and for the aircraft by 5%, CO emissions per flight by 10% and acoustic emissions lives of its inhabitants. 2 from aircraft at take- off and landing by 20 decibels. Society, which is becoming increasingly technological, faces new In particular, Thales is developing software for a flight management environmental challenges as regards energy, air quality, noise, climate system to optimise descent and climb phases, in collaboration with air change, biodiversity and other issues, which governments, control, leading to a reduction in the consumption of kerosene. Ground municipalities, economic and scientific operators and citizens must stations will handle air traffic with new applications, based on information address, while offering an improved work / life balance. provided by the avionics system, to optimise the flow of aircraft descents Thales therefore puts innovation at the heart of its strategy, developing and climbs. equipment that combines innovative technologies and a reduction in the Copernicus environmental footprint. To achieve this, Thales leverages its technical expertise and its capacity for innovation in order to understand the Thales remains heavily involved in Copernicus, the European space environment, support the development of air traffic and create the right programme. Formerly known by the acronym GMES (Global conditions for sustainable mobility and communication, and smart cities, Monitoring for Environment and Security), the programme aims to while reducing the environmental footprint. provide Europe with an autonomous Earth observation and monitoring capability thanks to continuous, independent and reliable access to Section 5.2.6 discusses how Thales’s solutions contribute to data in the areas of the environment and security. This involves environmental protection and particularly to initiatives to combat and monitoring of the marine environment, the atmosphere, land and adapt to climate change. Because Thales supplies numerous solutions climate change, as well as support for emergency and safety to clients for integration in other systems (B2B), it is difficult to measure interventions. For its space component, the programme relies mainly on their specific environmental footprint – particularly as a constellation of Sentinel satellites. concerns CO2 – as the conditions of use and decommissioning are unknown. Examples include equipment embedded on board aircraft ETCS and trains. However, impact analysis based on environmental studies ETCS stands for the European Train Control System. It simplifies train (simplified life cycle assessments) has been conducted on a wide operation, makes signalling smarter and more reliable, and ensures variety of equipment produced by Thales using “average” hypotheses optimal safety. Thales has been a key player in defining and of the above-mentioned conditions. It emerged that the use phase implementing this European standard, and continues to offer innovative accounts for around 90% of environmental impacts, with this impact solutions that comply with this standard. strongly influenced by the equipment’s long service lifetime. Work conducted during the design phase to improve energy efficiency and to Shift²rail reduce the weight of equipment built into mobile systems are the two Aiming to convert a significant share of road users to rail, this European main drivers in reducing their environmental impacts. initiative reflects the policy goal of achieving a 60% reduction in

Working methods are in place to analyse this footprint including CO2 greenhouse gas emissions by 2050. It also aims to make rail travel emissions (see Section 5.2.6) and the translation of these elements into more attractive and to integrate it with other modes of transport. Thales technical requirements allows for them to be taken into account in is one of the programme’s eight founding members. engineering and development phases. In addition, practices relating to GALILEO and EGNOS eco-design have been defined and are currently being rolled out through the framework. GALILEO is a European project for a satellite-based positioning system (radio navigation). The EGNOS service is designed to improve GPS accuracy and also offers the Safety Of Life service, which can be used 5.2.4.3.2 A key player in major programmes in civil aviation. From the outset, Thales has been a major player in both programmes. Thales is present in the space market as well as the air, rail and road transport markets and is positioned as a key player in major national, Electric-Taxiing with SAFRAN European and international programmes such as: Thales and Safran Landing Systems joined forces to optimise the energy Clean Sky conversion of the Electric- Taxiing system. Electric- Taxiing allows an aircraft to taxi independently without the use of its engines and without Thales is a founding member of the European aeronautics research the need for a tug tractor, thanks to electric motors located in the main program Clean Sky, whose environmental goals for 2020 include a wheels. The saving achieved in terms of fuel and CO emissions of 50% reduction in CO emissions, an 80% reduction in NO (nitrogen 2 2 X 3,000 single- aisle aircraft fitted with this technology, is equivalent to

224 THALES — 2017 Registration Document Environmental information — Corporate responsibility

that produced by one million cars. The ATRU (Auto Transformer Rectifier for the city of tomorrow in areas such as sustainable mobility, Unit) extremely high-powered transformer designed and developed by management of drinking water and wastewater, electricity, urban Thales will be offered to airlines on an optional basis and as a priority spaces and infrastructure, with the city of Quebec providing public for single- aisle aircraft. facilities for field tests.

5.2.4.3.3 Defining international standards 5.2.4.4 Adapting to climate change Thales encourages its partners to adopt a responsible attitude regarding The approach adopted by Thales for adapting to climate change climate change. To illustrate its commitment, Thales is joint chair of the is designed to reduce the Group’s vulnerability to such related impacts Carbon working group of the French Aeronautics and Space Industry as extreme weather (storms, floods, etc.), seismic events or resource Group GIFAS and is participating in the greenhouse gas working party scarcity. of the International Aerospace Environmental Group (IAEG) to define international emissions accounting standards. Over the past several years, Thales has assessed the exposure of Group sites to natural disasters as part of annual site visits focused on prevention. This analysis consists not only of identifying the potential 5.2.4.3.4 Partnerships risks of flooding, storms and earthquakes, but also of identifying the consequences of these events in terms of environmental impact, Thales is also engaged in partnerships with other industry players as property damage, business continuity, etc. well as research laboratories. Thales has thus mapped its risks related to water at around 160 sites The industrial chair dedicated to the challenges of greenhouse gas worldwide. The analysis of existing and future risks included the social emission monitoring systems, inaugurated in December 2011, is a dimension (access to water and sanitation, availability of water for local perfect example of this. It brings together scientific partners such as the inhabitants), economic aspects (conflict of use) and environmental French Climate Sciences and Environment Laboratory (LSCE), the French concerns (water consumption relative to the level of water stress in the Atomic Energy Commission (CEA), the University of Versailles river basin). The risk was scored based on a series of indicators, using Saint- Quentin- en-Yvelines (UVSQ) and the French National Centre for international data to ensure a uniform assessment. This mapping Scientific Research (CNRS) along with industrial partners such as Véolia process revealed that 10 sites were located in vulnerable zones. The Eau and Thales Alenia Space. majority of them are offices, whose low water consumption only has a A true innovation hub, the Joint Research Unit in Urban Sciences very minor impact. (UMR-SU), inaugurated in Quebec City in 2015, brings together the Thales is currently looking into extending this analysis to the mapping of complementary skills of academics, manufacturers, planners and urban its critical suppliers and to be in a position to assess its exposure to the managers. Managed and hosted by Thales Research & Technology, risk of natural disasters for its supply chain. this one- of- a-kind research laboratory aims to develop smart solutions

5.2.5 Protection of biodiversity

The preservation of species, their habitat and ecosystems, the Several Australian sites have put in place a habitat management plan preferential use of areas dedicated to flora and the protection of which partly involves enclosing several natural habitat areas to control historical and natural heritage are taken into account in all decisions access to herds. This helps to reestablish the natural biodiversity and with a view to contributing to environmental protection. restore the region’s original characteristics. Some species of flowers and animals have been registered on the site as well as some protected As early as 2006, Thales drew up a preliminary inventory of its sites in habitats such as that of the flying squirrel. France near or within protected areas for flora and fauna and their habitat and, on certain sites, assessed the impact of activities on Other sites will focus on outdoor features to preserve the natural habitat biodiversity and the degree of dependence on the ecological services and protect fauna (with bird boxes, feeders, species survey by an provided by nature. expert, etc.) or to re- establish native species, thereby guaranteeing a balance of habitats in terms of biodiversity, and offering a relatively safe At the same time, Thales embarked on biodiversity risk mapping at 140 and protected habitat for a wide variety of plants, fungi and animals. sites in 26 countries in order to obtain, as part of a macroscopic approach, a homogeneous overview of Group sites situated in the most Furthermore, as part of the grouping together of two of its sites near vulnerable areas in terms of biodiversity. The indicators defined are Bordeaux, France, between 2015 and 2017 Thales built a new used to analyse the risks for any project and integrate constraints for 16- hectare site in line with the Avoid- Reduce- Mitigate principle. The future developments, within a 2- km radius of sensitive sites. impact of the new site on biodiversity informed its location and building procedures. Environmental compensation measures put in place during Although the overall impact of the Group’s activities on biodiversity is the site’s construction continue to apply, in addition to a management low, flora and fauna are of particular concern and the Group plan for green areas which was also introduced. encourages its sites and employees to preserve and promote actions to protect biodiversity. For sites with large areas of plains or forests, particular precautions are taken for fauna and flora by promoting environmentally-gentle natural Various initiatives are taken across the world, and inventories are techniques for mowing and grazing and by eliminating phytosanitary carried out at some sites by volunteers or in partnership with local products. authorities or biodiversity protection agencies, and ad hoc management measures are put in place. At other sites, employee awareness will be raised through photographic exhibitions of the forest, agroforestry and the species present on the site; programmes with bee-keepers; a register of species and a dedicated online review. 5

2017 Registration Document — THALES 225 Corporate responsibility — Environmental information

5.2.6 Solutions to support the environment

5.2.6.1 Environment and products 5.2.6.2 Eco- responsible products and innovation Continuous efforts are made to incorporate the environment into the entire product life cycle from cradle to grave while maintaining the Several group companies are engaged in various initiatives to reduce strictest standards of security, safety and reliability expected by the the environmental impact of commercial and military products starting Group’s customers. The systems and high- tech products and services from the design stage. A number of product lines already incorporate offered to the aeronautics, space, defence, transport and security markets strict environmental criteria assessed during life cycle analyses. are fully equipped to limit their environmental impact but are sometimes hard to square with this approach due to high technical constraints. Thanks to its capacity for innovation, which is central to its strategy, Thales develops breakthrough technologies and new architecture that Nevertheless, Thales is committed to a responsible, proactive approach help to promote “green” innovation. aimed at limiting as much as possible the impact of its products and services on the environment in order to comply with the increasing One example is Stratobus (a project launched in 2016), an autonomous number of regulations along with the demands of the market and civil geostationary stratospheric platform designed for a wide range of society. This is true of products that are eco-designed, i.e. that have an applications such as border and maritime surveillance, boosting GSM improved life-cycle environmental impact, or solutions with features that network capacity for public events and augmenting GPS over areas of support the environment, for example by providing an understanding of dense traffic. This platform offers tangible environmental benefits. It runs extreme weather events. on solar energy only and does not require a launcher to be put into position. It is made from recyclable subsystems and the use of hydrogen Incorporating environmental factors into design generates the creativity or helium considerably reduces the risk of pollution in the event of an and dynamism needed to make progress and to promote green accident. It is designed among other things to harness the sun’s rays in innovation in areas such as developing new materials, saving energy all seasons and features a number of technological innovations, such as and reducing weight. a power generation system coupling photovoltaic panels to a solar To help in this approach, Thales applies skills throughout the Global power amplification system patented by Thales and an energy storage Business Units (see Section 5.2.1.2.). system based on an ultra-lightweight regenerative fuel cell. The project underwent a review by the interested parties in November 2017, who The Group’s guidelines integrate the environmental aspect, from bids to confirmed its feasibility. product policies, design, development, maintenance and end-of- life phases. To ensure regulatory compliance, anticipate future regulations The Reality H helicopter simulator can reduce the number of flight hours and requirements in this area, and guarantee traceability during the life and energy consumption (five times lower than the previous generation cycle by looking ahead to dismantling, Thales is developing methods model). This gain has been achieved through the development of a and tools to help product designers and architects make responsible simulator motion system, based on electric power rather than on a choices and access environmental information. Resources include hydraulic system and offering much better performance without the risk guides, questionnaires, checklists, computers and dedicated software of pollution. Life cycle analysis has led to the use of lighter, recyclable tools such as the database on hazardous substances in components, materials, as well as a reduction in size and weight, thus enabling easy

regularly updated following regulatory changes, such as in REACh, or transportation and lower CO2 emissions. environmental impact analyses. Practices linked to the eco- design Thales also lends its support to encourage the deployment of renewable approach are defined in the engineering framework and made energies. Wind farms interfere with civil aviation, defence and weather available to developers. radars by creating a masking effect and triggering false alarms. This One example in the area of medical imaging are the developments problem has led many countries to defer their plans to build wind farms. carried out on a pre- treatment unit, in relation to the detector part, To address this situation, Thales has developed a material that absorbs which led to a reduction in mass of 30% and in consumption of 70% broadband radiofrequency. between versions 1 and 3. Projections for 2018 and beyond aim for This material reduces the Equivalent Radar Surface (ERS) of the objects this mass to be phased out completely through integration of the coated with it, attenuating or eliminating the interference. The radar software into the customer’s computer and for consumption to be signature of wind turbines is reduced by 99%. This solution has now divided by three. been added to an existing solution consisting of a series of algorithms Thales is also a key player in national, European and international enabling radars to determine whether an echo has been sent by an programmes to reduce the environmental footprint of products (see aircraft or a wind turbine, thus reducing the risk of transmitting erroneous Section 5.2.4.2). information to air traffic controllers. Lastly, Thales has been selected to take part in the European Space In transport, Thales offers a predictive maintenance system to metro Agency’s GreenSat study. This study is focused on the eco-design of a network operators, consisting of a data analysis service in the Cloud satellite to reduce its environmental impacts as much as possible. The thanks to a secure platform. When they deviate from the norm, study will include material aspects and manufacturing processes, as warnings are triggered, and recommendations are made as to the best well as methods for the management of operations and the course of action to take. This helps to improve reliability and reduce implementation of a mission in space. The eco-design approach will be maintenance impacts. compared to the conventional design approach, to estimate differences Thales is also careful to identify replacement products if a substance in the environmental impacts and in the costs and planning. Thales also presents a risk or might be banned. A dedicated programme has been takes into account requirements allowing it to prioritise the reduction of launched to manage this issue, in light of the potential impact a ban on environmental impacts by looking to the future. As part of the certain chemicals could have on the Group’s processes and products. Scorpion-EBMR programme, baseline conditions for the initial version Conducted internally or with industrial partners, substitution surveys are were established and will be used to define targets for improvement intended to validate the characteristics and implementation processes of during changes in the system. a new substance and to ensure that the product will continue to perform as expected. In some cases, it is necessary to redesign products and interfaces and rescope industrial tools.

226 THALES — 2017 Registration Document Environmental information — Corporate responsibility

In the case of chromates for example, Thales carried out the These initiatives help to reduce kerosene consumption, carbon footprint, qualification, for its applications, of more than 30 alternative industrial and nitrogen oxide emissions as well as to improve reliability while processes and verified the capacity of its subcontractors to manage reducing maintenance costs. these processes to meet its requirements. Thales set aside €5 million for An example of this is the Flight Management System (FMS), which this work and for the deployment of replacements in equipment and calculates the optimal flight path according to aircraft data, weather systems to reduce the use of authorisations under the REACh regulation. conditions and the desired arrival time, while ensuring less noise, fewer emissions and lower consumption during take-off, ascent, cruise, 5.2.6.3 Innovative solutions descent and approach. New avionics system architectures help reduce energy consumption, for the environment limiting the amount of on- board equipment and making it more

compact so that it is easier to transport, thereby cutting CO2 emissions. 5.2.6.3.1 Understanding the environment The integrated modular avionics featured on the A380 made it possible to streamline computing requirements and reduce the weight of Thales is a key player in space- based Earth observation programmes, hardware by 15- 20% while increasing computing capacity and the providing high- resolution optical and radar imaging systems that useful life of equipment. promote a better understanding of climate change and more effective Through its participation in these programmes, Thales integrates the environmental monitoring. The Group, in partnership with global taking into account of its customers’ increasingly high demands to agencies, contributes to most European climate missions, and is reduce environmental impacts. positioned in: the collection of essential information for climate forecasts and • 5.2.6.3.3 Sustainable mobility monitoring of the general status of plant life: topography of the surface of the oceans, ice floes and land surfaces; observation of In today’s increasingly urbanised world, creating sustainable conditions ocean currents, pollution and marine life; the increasing temperature for urban mobility and inter- city travel is one of the most effective ways on the surface of the sea and land; and the overall status of to reduce CO emissions. Thales plays an important role in this by vegetation to better manage its development (Sentinel 3 satellite); 2 supplying transport operators with systems that optimise operational • observation and anticipation of extreme, sometimes violent weather efficiency while limiting their environmental impact. Thales solutions events, (hurricanes, floods, etc.), and long-term monitoring of provide: climate change via Meteosat satellites; • simpler access to transport with interconnected public transit that • greenhouse gas monitoring, particularly carbon dioxide. This allows passengers to use different modes within and between towns monitoring specifically includes the pinpointing of anthropogenic and cities, at regional or national level, with a single ticket; sources and the study of carbon sinks, and how they evolve in smoother traffic flows thanks to urban traffic management systems response to climate change. The complementary nature of the • that make it possible to regulate vehicle flows and handle trouble French (Microcarb) and European (CarbonSat) space-based spots in real time. This means that motorists spend less time in their observation initiatives means that all monitoring goals can be cars, use less fuel and produce fewer CO emissions; addressed. 2 a reduction in power consumption on underground lines, allowing As an example, the Poseidon technology, developed by Thales Alenia • underground operators to address environmental protection Space in partnership with CNES, has significantly modified the tools concerns while lowering their operating costs; used in the world of oceanography. The accuracy of measurements has highlighted the thermohaline circulation of the world’s oceans – an • an increase in the capacity of the existing main line network and energy transport system as regards the global climate – as well as the reduced travel time, while ensuring compatibility between the rise in sea levels due to global warming. All satellites in the Jason various European rail networks. mission are fitted with a Poseidon altimeter. Jason 3 focuses for instance For example, the Green SelTrac® CBTC solution reduces a train’s on measuring the height of the oceans that supply the monitoring and energy consumption by 15% by loading efficient speed profiles into the prediction models for climate change. train’s on-board system. Algorithms are used to limit energy- intensive For the future, the KaRin project, born out of a collaboration between stop/ start cycles and to switch off power so that trains run on their NASA / JPL- CNES-Thales Alenia Space, should result in the delivery of a accumulated power whenever possible. For a standard underground wide-swath radar interferometer, a key element in the SWOT (Surface line, CO2 emissions are reduced by around 14,000 tonnes per year, Water and Ocean Topography) altimetry mission. This will ultimately allow equivalent to taking 6,000 cars off the road. To date, Thales’s solution for the use of hydrology to measure the typography of bodies of fresh Thales Green SelTrac® CBTC operates more than 85 lines in more than water, lakes and flood zones with a surface area as small as 250x250 40 cities. sq. m and rivers as narrow as 100m, and following on from the Poseidon The ATSsoft Energy Saving solution takes advantage of interactions altimeters, to measure the level of oceans with better global coverage. between trains to save energy by optimising real-time traffic management: use of slow speed profiles when the operating 5.2.6.3.2 A cleaner sky circumstances permit and optimisation of current recovery from train braking by synchronising the acceleration of some trains with the From flying to air traffic management, for over 30 years, Thales has braking of others. developed features that improve performance and lower the environmental impact during all flight phases: 5.2.6.3.4 Smart Cities • navigational aids to optimise flight paths, take-off and landing phases in particular and taxiing that take weather conditions into Data analysis makes cities more efficient. Thales’s solutions collect data account, thus reducing noise, emissions and consumption; on such parameters as water and energy consumption, subscriptions to various public and private services, and transport users, allowing city systems for more fluid air traffic management with less waiting time • authorities to improve residents’ quality of life and reduce their in airport stacks; environmental footprint. Through its data analysis solutions, Thales helps • solutions to supply electric power to a number of aircraft systems city planners and managers: which were previously supplied with hydraulic or pneumatic energy; • leverage the gigantic data reservoirs of the connected city – • lighter, less bulky and more efficient equipment. smartphones, street lighting, transport, billboards, access to public 5

2017 Registration Document — THALES 227 Corporate responsibility — Environmental information

places, surveillance cameras, etc. – to better understand and used across the entire network. Statistical analysis applied to the data anticipate the needs of residents and offer them services that make collected gives an insight into mobility across this vast area, meaning their lives easier; that supply can be tailored to actual needs, new services can be created and the use of public transport can thereby be encouraged. • inform users via traffic information systems, giving motorists and train passengers information on traffic conditions in near- real time; Thales contributes to the Hyderabad programme (India) to become a “green” city, in particular by supplying to the new metro system opened manage day- to-day operations more effectively and facilitate the • in 2017 CBTC (Communication Based Train Control) and ISC coordination of the various players, especially in the event of an (Integrated Communications and Supervision) systems, for the very first emergency. These solutions also improve the environmental time in the country. This environmentally friendly metro should reduce efficiency of cities with regard to water and energy consumption, carbon emissions both through using zero emission electricity and by transport use, etc. limiting high- emission road transport. For example, the PRESTO electronic system, designed and developed Going even further, Thales Research & Technology Quebec hosts and by Thales, allows residents of the Greater Toronto Area to travel using manages the Joint Research Unit in Urban Sciences (UMR-SU), which the various means of public transport (train, underground, bus) using a aims to identify needs and new technologies in the city of tomorrow. single ticket, in the form of an electronic contactless card that can be

228 THALES — 2017 Registration Document Environmental information — Corporate responsibility

5.2.7 Environmental indicators

The table below contains a number of items for assessing trends in Thales’s environmental performance on a comparable basis. In 2017, the scope comprised 28 countries and 155 sites. This scope represents 97% of sales and 98% of the Group’s workforce. 2015 is the base year for the 2016- 2018 goals. This chapter was subject to a fairness review by Mazars. In Section 5.4 “Independent third-party report on consolidated human resources, environmental and social information published in the management report,” the opinion provides moderate assurance concerning the indicators in the table below.

Units 2008-2015 2015 2016 2017 2015- 2017 change change (at constant 2008 scope)

Energy Electricity consumption Thousand toe –12% 131 (b) 131 132 1% Per sales electricity consumption Toe / €k –27% 9.57 (b) 9.1 (b) 8.65 –9% Fossil energy consumption Thousand toe –38% 21 21.9 21.9 4% Per sales fossil energy consumption Toe / €k –48% 1.54 1.52 1.44 –6% Total energy consumption Thousand toe –17% 154 (b) 155 (b) 156 1% Per sales total energy consumption Toe / €k –31% 11.2 (b) 10.7 10.2 –9%

Water Water consumption Thousand cu. m –26% 1,540 (b) 1,587 (b) 1,593 3% Per sales water consumption Cu. m / €m –39% 112.3 (b) 110.3 (b) 104.4 –7%

Waste Total waste production (a) Tonnes –24% 15,045 (b) 14,967 (b) 16,080 6.9% Per sales total waste production (a) Kg / €m –36% 1.10 (b) 1.04 (b) 1.05 –3.9% Ratio of non- hazardous waste (a) % 73 75.3 (b) 81 10.3% Non- hazardous waste per person (a) Kg / pers –29% 161.2 (b) 159.7 (b) 179.5 11.3% Non- hazardous waste recycling rate % 45% 64 50 (b) 55 –14.6% Hazardous waste recycling rate % –45% 19 24.8 32 68.8%

Industrial discharge Industrial wastewater discharge Thousand cu. m –1% 562 (b) 652 595 6% Air emissions Tonnes –30% 917 993 923 1

CO2 (b) CO2 emissions from energy use Thousand tonnes CO2 –23% 187 187 188 1%

Per sales CO2 emissions from energy use Kg CO2 / €m –36% 14 13 12 –9%

CO2 emissions linked to Kyoto Protocol Thousand tonnes CO2 –23% 35 27 30 –14% substances and R22

O / w CO2 emissions linked to SF6 Thousand tonnes CO2 –78% 6.7 1.6 3.4 –49%

CO2 emissions from transport (Group- wide) Thousand tonnes CO2 –1% 79 81 77 –2%

Per sales CO2 emissions from transport Kg CO2 / €m –17% 5.8 5.6 5.07 –12%

CO2 Scopes according to GHG Protocol Scope 1 (gas, fuel oil, coal, substances, mobile energy sources) Thousand tonnes CO2 –35% 88 82 86 –2%

Scope 2 (electricity, steam) Thousand tonnes CO2 –13% 136 134 136 0%

Scope 3 (business travel by air, rail, road) Thousand tonnes CO2 –1% 79 81 77 –2%

TOTAL SCOPES 1, 2 AND 3 THOUSAND TONNES CO2 –17% 303 297 299 –1% € TOTAL SCOPES 1, 2 AND 3 PER SALES KG CO2 / M –31% 22 21 20 –12%

Other disclosures ISO 14001-certified entities 117 120 124 Staff concerned as percentage % 90% 89% 89% of total workforce

(a) Excluding exceptional waste. (b) Adjustment of 2015 scope following the resale of a site. 5

2017 Registration Document — THALES 229 Corporate responsibility — Environmental information

5.2.8 Environmental reporting rules

5.2.8.1 Scope 5.2.8.2 Reporting procedure

The consolidation scope of environmental data is based on the The Group-wide reporting system includes an environmental reporting financial consolidation scope. However, due to restricted activity procedure with instructions for each successive stage of data entry, and/ or workforce or the absence of operational control by Thales, validation and consolidation. It also defines the roles of each person certain establishments have not been included. involved and includes the recording of data (traceability, archiving, etc.). In connection with this report, the 2017 indicators are provided at constant scope with 2015. 5.2.8.3 Indicators 5.2.8.1.1 Criteria Environmental concerns change over time. Environmental performance Only companies meeting the following criteria are included: indicators therefore have to evolve to stay abreast of developments and reflect the Group’s policy priorities. Different interpretations of certain Equity interest and operational control indicators can lead to conflicting data from different countries. Thales is • Thales equity interest of 50% or more; therefore adapting the indicators to make the environmental reporting system more efficient, building on lessons learned from previous years Thales exercises operational control over the company. • and refocusing the reporting effort on current and future environmental Companies and joint ventures not meeting the above criteria are not concerns. The indicators are described in the reporting tool. Information included in Thales’ environmental reporting. is also available on the calculation of the carbon footprint. Activity/ workforce 5.2.8.3.1 Reporting tool • ”Company /site” involved in an industrial activity (surface treatment, painting, pyrotechnics, shipbuilding, etc.) irrespective of the number An environmental reporting and management tool for the entire scope of employees; of consolidation of the Thales group is available on the corporate • ”Company /site” involved in a semi- industrial activity only (testing, intranet. This tool consolidates the data from each entity, country and integration, R&D, etc.) with more than 50 employees; geographic area, and for the Group as a whole. It checks data consistency and suggests country-specific units of measurement, ”Company/ site” involved in a tertiary activity only (head office, • conversion factors, etc. The same tool provides access to the rules for service facility, sales office, etc.) with more than 100 employees. data entry, validation and consolidation defined in the reporting Environmental Management System procedure. All “companies/ sites” that are ISO 14001 and/ or EMAS- certified are included in the scope irrespective of the criteria related to activity. 5.2.8.3.2 Analysis of performance

For easier analysis of environmental data, the Group reporting system 5.2.8.1.2 Changes in scope incorporates the following principles: • Disposals /acquisitions: company to be included as soon as one full • changes in scope specifically related to disposals and acquisitions. calendar year has been completed and if the company meets the For each family of indicators, a gross figure is given (e.g. water scope selection criteria. consumption in cubic metres) and a ratio supplements the information to take account of changes in scope (e.g. water New business: company to be included as soon as one full • consumption per person); calendar year has been completed and if the company meets the scope selection criteria. • Group targets are set for a given period. During that period: – changes in performance are assessed on a like-for- like basis (i.e. Inter- site transfers: data taken into account in the reporting: • at constant scope of consolidation), – of the departure site from 1 January Y to the date of transfer, – coefficients such as emission factors for CO emissions are – of the arrival site from the date of transfer to 31 December Y. 2 constant; Intra-Group merger: integration of data for the absorbed entity for • if emission factors are modified at the start of a new period, the the period from 1 January Y to the date of absorption into the data of • performance data for the reference year are recalculated using the the absorbing entity. new coefficients; • the principles and methods for reporting on data are described in the methodological guides to environmental reporting and

calculation of CO2 emissions, which are available in the Group reporting system.

230 THALES — 2017 Registration Document Social information — Corporate responsibility

5.3 SOCIAL INFORMATION

The Group’s strong commitments, formalised in its Code of Ethics, attest to its desire to act responsibly. Certain actions undertaken by Thales in connection with its corporate responsibility policy target other stakeholders than its own employees.

5.3.1 Territorial, economic and social impact of the Group’s activities

5.3.1.1 The Group’s regional (35 placements: 28 involving Thales employees, 6 from Nokia and 1 policies in France from Schneider Electric). In 2017, there were 10 new placements involving Thales employees. The Group’s regional policy relies on the quality of its relations with The rollout of the Pass’Compétences initiative continues in the region of economic, social and academic players and local institutions and Occitanie, and was launched in April 2017 in Nouvelle-Aquitaine with communities. Whenever to the greatest extent possible, its sub- contractors, funding from the region’s economic services. suppliers and industrial partners are chosen locally in order to support regional business. In addition, Géris Consultants, in partnership with Thales HR teams, assists the professional integration of work study employees: In France, Thales aims to mobilise all of the relevant players in its labour pools in order to develop Regional Workforce and Skills planning. This • by promoting the “Shared Learning Path” initiative; strategy takes into account the specific characteristics of the regions in by inviting SME with open positions (23 SME requested submitted question as well as Thales’ local challenges. The Group agreement to • more than 147 job offers in 2017) to Thales’s annual forum for Top promote professional development and employment through proactive Interns and Work- Study Employees; initiatives signed on 26 April 2013 actively supports local action by creating a Commission on regionalism and relying on a Group • by coordinating Thales’s participation in the “Altern’UP 2017” contest Anticipation representative, as part of a joint organisation, to coordinate under the aegis of the FIPA: four employees at the end of work-study the Thales Regionalism community and monitor regional actions. programmes who submitted a total of three projects were selected to participate in the Creativ’Week during which they were trained in The policy is based on a knowledge of each labour pool, key players, key topics for business creation and had the opportunity to improve and three priority areas of focus: their business model in a collaborative, dynamic and inspiring way. • Skills maintenance and development; At the end of the contest, Thales awarded the Innovation prize to the • Professional integration of young people, education and training; winner selected by the judging panel; • Co- development of the industrial fabric and open innovation. • Géris Consultants also shares its expertise with large companies In France, Thales has thus created nine labour pools in order to better and local authorities in order to provide assistance, in the form of coordinate its action. Within each labour pool, a correspondent advice and innovative financial engineering, to SME and SMI that coordinates regional actions in cooperation with the local and regional create long- term positions in regions impacted by the loss of authorities, social and economic players, and Thales’s Engineers for industrial jobs. The revitalisation projects led by Géris Consultants Schools seconded to academies, universities, schools and training centres. since 2009 have led to the creation of nearly 4,800 jobs in France (including 210 in 2017) with approximately 700 SME and SMI. In France, Thales also makes use of a dedicated local economic development company, Géris Consultants, which assists, in collaboration with the Anticipation representative, with the roll-out of the Group agreement for professional development and employment through 5.3.1.2 Group initiatives anticipation initiatives, by coordinating the network of Thales Engineers to support people for Schools and supporting Group employees to take over or start a business (62 new projects in 2017). Géris Consultants also conducts with disabilities HR engineering experiments to develop the performance and skills of In France in 2017, the Group continued its partnerships for the training Thales’s suppliers and more generally of SME/ SMI in labour pools, to and guidance of young people with disabilities, with highlights including: support the professional development of employees from large companies, and to facilitate the integration of young people into the • a new partnership with the University of Rennes to be added to local industrial fabric. those existing with the Universities of Orleans, Tours and Lille as well as with the Île-de- France university communities, Pierre & Marie Curie For this purpose, Géris Consultants coordinates the Pass’Compétences University (UPMC Paris), the University of Nice Sophia-Antipolis inter-company outreach tool, the Shared Learning Path initiative (UNICE), the University of Bordeaux 1, the University of Toulouse, and (in connection with Fondation Innovation Pour les Apprentissages – the University of Western Brittany (UBO Brest); Innovation for Learning Foundation (FIPA)), and, through Thales’s Shared Training Service offers the implementation of Thales methodology • in line with the many existing agreements already signed with known as Trans’Faire – tailored transfer of skills between a mentor and educational authorities designed to help high school students with a mentee – in French SME / SMI. disabilities to access higher education and monitor students with disabilities, work is ongoing to establish an agreement with the More specifically, the Pass’Compétences initiative is designed to educational authority of Aix-Marseille and Bretagne. These stimulate SME development by assigning them voluntary expert agreements cover almost all the labour pools where Thales is present; employees from large companies (Thales, Schneider Electric, etc.) for pivotal assignments lasting between 12 and 18 months, which create • the partnership with Paris- Est Créteil University to set up an local employment and wealth. Offers (profiles of voluntary expert inter-university diploma (IUD) in disability representation in the public employees from large companies) and requests (SME/ SMI / start-up) for or private sector continued. 21 students received the diploma in 2015, skills are constantly updated on the www.pass-competences.net 22 in 2016 and 26 in 2017; website, in addition to numerical projections by CEOs (the creation Thales continued to be involved in the development of the Hanvol of 816 new jobs and combined wealth estimated at €185m by • non-profit organisation, whose mission is to find jobs for people with 2020) and the results observed since the initiative’s launch in 2012 5 disabilities in the field of aeronautics;

2017 Registration Document — THALES 231 Corporate responsibility — Social information

• the Group also continued its involvement in the agreements to • in 2012, Thales participated, in cooperation with AFNOR, in implement software architecture and information system engineering implementing the “OK Pilot” tool for a company to self-audit its courses at Vocational Rehabilitation Centres (CRP) in Millau and compliance with the disability-friendly standard and to define the Mulhouse. necessary action plans for improvement. Thales also participates in the implementation of innovative projects The Group also stepped up its local involvement in SME through based on technologies developed within the Group in order to provide initiatives such as those put in place, in the department of Hauts-de- Seine, practical assistance to people with disabilities. Initiatives include: with a partnership agreement, signed on 9 December 2016, with the aim of supporting SME through large groups in the implementation of the “Eyeschool” system, which enables young visually- impaired • their employment policy for people with disabilities. people to have what the teacher writes on the board transferred to their computers and documents distributed in class to be vocalised. The Group’s expertise and commitment with regard to disabled In line with the assessment report by France’s Education Ministry in employment have been widely recognised, as evidenced by the 2016 2015 encouraging the expansion of the scheme in schools and appointment of Thales Mission Insertion Director to French national universities, Thales continued its action in this area by assisting consultation committee for people with disabilities (Conseil National visually- impaired school and university students; Consultatif des Personnes Handicapées – CNCPH) and national committee for the fund for disabled employment in the public sector • the GUIDEO guidance system, which helps a blind or visually- (Comité National du Fonds d’Insertion des Personnes Handicapées dans impaired person to move autonomously through a building using a la Fonction Publique – FIPHFP) in his capacity as an expert. smartphone (the system was tested on the Gennevilliers site);

5.3.2 Fair business practices

5.3.2.1 Anti-corruption • an alert system available to all Group employees (permanent employees, casual employees and external staff); Corruption represents a major risk for multinationals, particularly those • risk mapping; with export operations. It exposes these companies, as well as their employees and managers, to criminal and civil sanctions and can be • an assessment of the main commercial partners. In particular, Thales very harmful in terms of reputation. strictly supervises the use of agents and consultants by means of a detailed procedure, which provides for in- depth upstream checks At the end of the 1990s, in order to protect itself from these risks, Thales and controls (due diligence) backed by an analysis of the risk factors introduced a corruption risk prevention policy, which is being continually at play, and for all appropriate declarations and undertakings on the improved. This policy is regularly reviewed and the provisions are part of these agents or consultants. This procedure is regularly constantly adapted to take into account legislative and regulatory reviewed and was updated in 2017; developments, in particular the entry into force in June 2017 of the French law on transparency, the fight against corruption and • a training plan for exposed employees, consisting of face- to- face modernisation of the economy (known as the Sapin II law). sessions and e- learning modules; The policy is based on an integrity programme, the various components • accounting control procedures. of which are integrated into the operational procedures, and supported by a dedicated organisation. 5.3.2.1.2 Clear operational measures

5.3.2.1.1 An integrity programme adapted The pillars of this integrity programme are integrated into the different to the new legislative environment operational processes of Thales’s reference system (Chorus 2.0). From the preliminary phase of a project, these processes which govern the Thales launched a review of its integrity programme to bring it into line management of offers and projects also provide for action plans to with recent legislative developments, in particular the French Sapin II law. mitigate business risks, with a particular focus on anti-corruption and the management of health, safety and environmental impacts. In addition, The integrity programme is based on: the provisions of the integrity programme are also built into purchasing • clearly stated, shared principles. The zero tolerance policy concerning and subcontracting processes. As a result, the players in the supply chain all acts of corruption has the full support of Group corporate are also stakeholders in the integrity policy: at the end of 2017, close to management. With a foreword by the Chairman and CEO, the 12,700 suppliers and subcontractors in the portfolio pledged to adhere Code of Ethics expressly reiterates this principle. The Code of Ethics to the terms of Thales’s Purchasing and Corporate Responsibility Charter. in addition to a range of thematic guides (gifts and hospitality, Using risk mapping and rigorous internal control, the Group’s Audit, conflicts of interest, lobbying, etc.) published in several languages, Risks & Internal Control Department conducts regular compliance and are made available to all employees on the Group intranet; integrity audits on the various components of the model and their • a code of Conduct which defines the types of conduct that are implementation. prohibited as they may be construed as acts of corruption or influence peddling. It applies to all employees of the Group. It has been incorporated into the internal regulations of the Group’s French companies and is in the process of being rolled out to its foreign subsidiaries;

232 THALES — 2017 Registration Document Social information — Corporate responsibility

5.3.2.1.3 A dedicated organisation The Thales corruption risk prevention policy has been recognised by stakeholders. In 2017, for the first time, Thales was ranked the company The Group’s corruption risk prevention policy is underpinned by a which has developed the most advanced corporate responsibility policy dedicated organisation. Thales has governance bodies and an in the world in the “Aerospace & Defence” sector by the Dow Jones organisational set- up designed to establish, manage and monitor the Sustainability Index (DJSI). implementation of regulations with regard to the prevention of The Group is also ranked in the top four European companies in the corruption risks, as well as to instil a culture of corporate responsibility Defence companies anti-corruption index published by the NGO throughout the Group. Transparency International in 2015 (the year of publication of the last Confirming the central role played by ethics and corporate responsibility rankings of this type). Finally, the Group has renewed its support for the in the Group’s strategy, Thales created an Ethics & Corporate principles of the United Nations Global Compact and was one of 447 Responsibility Committee in 2001 composed of representatives from the companies to obtain Global Compact Advanced level for their support functions and the main countries where the Group operates. Its Communication on Progress in 2017. tasks are focused on three areas: (i) Strategy: contributing to defining Thales’s policy on ethics and corporate responsibility; alerting and 5.3.2.1.4 An alert mechanism making ethical recommendations with regard to the standards and procedures concerning sales, environmental, human-resource- related Since 2004, Thales has put in place an alert mechanism available to and social issues; (ii) Ownership: ensuring that the internal codes are all Group employees, in addition to the existing alert channels, namely kept up to date and implemented within Thales; defining training the hierarchical route and the employee representation bodies and, objectives and suitable means of communication; coordinating and where applicable, specific alert mechanisms in certain countries. monitoring the Country Ethics Committees and ethics officers; (iii) Sharing: holding discussions amongst its members on good practices, This mechanism is under review in order to bring it into line with the experiences and the ethical issues submitted to it. requirements of the Sapin II law, the new European regulation on personal data protection which will enter into force on 25 May 2018 The Group’s Ethics & Corporate Responsibility Committee is chaired by the and law 2017-399 on the duty of care of parent companies and Group Secretary & General Council. In 2017, the Committee met three times. subcontracting companies. The Ethics and Corporate Responsibility Department is responsible for the Group’s actions in terms of ethics and responsibility, coordinating the relevant people within the Group, addressing and ensuring that the 5.3.2.2 Consumer health ethical issues submitted to it are handled and followed up correctly, and safety through an ad hoc committee where necessary. Ethics officers ensure that the Code of Ethics and its principles are Thales’s products, technologies and services are aimed primarily at disseminated throughout all the Group’s units and specifically to governmental customers in the “B2G” (Business to Government) new hires. Their role consists of overseeing staff training and positioning, in particular in the Defence and Security segments, or at awareness-raising, responding to questions concerning the application private “B2B” (Business to Business) customers, notably in the of the Code of Ethics and the code of Conduct, and bringing the aeronautics, space and railway transport segments. Group’s ethics policy into line with local customs and legislation.

5.3.3 Relations between Thales and its stakeholders

5.3.3.1 Customer relations • project and support teams at the ready to respond to contractual requirements and operational needs, working in close collaboration Customer confidence is central to Thales’s commitments and one of its with customers and partners; key values. The very or core nature of Thales’s activities requires a • a Quality and Customer satisfaction organisation to support the sustainable relations and commitment. Thales must act as a strategic teams and monitor customer interests. partner towards its customers, understanding their challenges, strategic objectives and operational needs. Thanks to its policy of ensuring a local presence, based on offering customers proximity, attentiveness 5.3.3.1.2 Regular measurement of customer and support in the long term, it has established itself as a major satisfaction and confidence industrial player in its “traditional” countries with the ability to expand its presence in high- growth countries. For Thales, assessing the satisfaction and confidence of its customers is a key indicator of its operational performance and a source of constant progress. 5.3.3.1.1 An organisation which promotes For this purposes, Thales is equipped with a global system for gauging customer relations and managing the quality of customer relations based on: a satisfaction survey schedule with a frequency of 18 months to 2 Thales’s organisation is designed to develop a relationship as close as • years; possible to the environment and the business activity of its customers: a network of independent consultants across a hundred countries to a global setup, providing a local presence, both commercially and • • meet customers and take stock of relations; in terms of operational capacity; • a centralised digital platform for customer data and feedback; • a global network of 250 Key Account Managers (KAM) dedicated to managing customer relations, covering all the different • indicators and analysis on the different market segments, types of organisations and activities of the Group; customers, product lines, etc.; • business Lines building a strategy and a range of products, systems • action plans coordinated by account managers to respond to the and services tailored to the needs and strategic developments of specific issues of each customer; markets and customers; • transverse analyses, which can detect weak signals and showcase • a marketing organisation, which drives coherence between Thales’s advantages and differentiating factors as well as recurring customer 5 offer and the requirements of the market and customers; expectations for use in performance plans.

2017 Registration Document — THALES 233 Corporate responsibility — Social information

The global scope of this approach is appreciated by customers, who 5.3.3.2.2 Involve suppliers in an approach clearly see Thales’s desire to forge relationships based on trust and based on collaborative innovation cooperation, constantly striving to better respond now and in the future to their key challenges. As part of its Purchasing strategy, Thales also develops a collaborative innovation approach with its suppliers. This involves quarterly meetings In 2017, the survey conducted on a representative panel of 1,900 for discussion between the representatives of the Group Purchasing and contacts from 620 customer accounts in 100 countries, covering all of Research & Technology Departments to identify the best players, classify the Group’s Defence and Civil activities established that 74% of the them in relation to the Group’s requirements and be in a position to Thales customers asked stated to be satisfied or highly satisfied with launch with them analysis, studies upstream or PoC (Proof of Concept); Thales; while 84% of customers asked confirmed that they would be this approach has the potential to identify critical innovations and/ or prepared to recommend Thales. technological breakthroughs in both the military and civil fields. An internal application was also developed in 2017 to assess the 5.3.3.2 Supplier relations: potential in terms of R&T and the offer of innovative start- ups and SMEs to Thales’s prescribers and buyers; at the end of December 2017 almost a responsible approach 500 start- ups had already been added to the database. In parallel, Thales organises or participates in dedicated events which are an opportunity to meet players in innovation such as the Thales Geographic breakdown of Group purchasing in 2017 InnovDays (showcasing micro-enterprise, SME and start-up partners involved in ongoing projects) or the Thales Open Innovation Day (event European Union (excluding France) 30% organised with the Pôle Minalogic which was a springboard for some fifty European start- ups during pitches or BtoB meetings). Thales is also

€6.79 billion involved in many incubators, such as Starburst, the number one France 41% 24% of which are worldwide Aerospace start-up accelerator. Finally, since 2012, Thales industrial sub-contracting has signed the “Innovative SME charter” and has actively participated services Rest of world 29% in several multi-sectoral actions taken by its signatories (primarily publicly-funded French companies) to help SME in their innovation projects and contribute to their future development. In line with this initiative, Thales has also shown its commitment to France’s Ministry of the Armed Forces through a bilateral agreement. This initiative, known as the “SME Defence Pact”, is primarily aimed at 5.3.3.2.1 A recognised purchasing policy improving the access of SME to defence markets and establishing a balanced partnership between SME and industry champions such as The aim of the Thales purchasing policy is to work with a bedrock of Thales; actions are reviewed regularly and at different levels in efficient, reliable suppliers, capable of helping the Group achieve its conjunction with those involved. In France, Thales works with more than sales objectives while complying, in particular, with export control 3,000 SME and mid- cap companies representing a commitment in the requirements and with environmental, financial, ethical and social amount of more than €1.7 billion in 2017. obligations as well as national and international regulations. This policy is based on ten responsible purchasing practices specified 5.3.3.2.3 Strengthening links with SME in the Responsible Supplier Relations Charter, of which Thales has been a signatory since 2010. The aim of the charter is to develop a Since its creation in 2010, the Group has also been heavily involved balanced relationship based on trust between suppliers and customers with the organisation Pacte PME and still sits on its Board of Directors. in the knowledge and respect of their respective rights and obligations. As part of a proactive initiative to develop good practices, Pacte PME To this end, the Group has also appointed an internal mediator to act aims to facilitate the growth of SME and the emergence of new between suppliers with a view to trying to resolve potential conflicts mid-cap companies. In 2017 for instance, the Group actively which could arise in connection with its contractual relations with its participated (design, implementation and support) in an experimental partners; the Thales internal mediator’s actions are also in line with the reinforcement programme for thirty SME from the aeronautics and initiatives carried out by the mediator of the aeronautics and space space sector, in particular on subjects relating to growth sector driven by GIFAS (Groupement des Industries Françaises and competitiveness. Several Pacte PME partners also contributed to Aéronautiques et Spatiales). the implementation of this programme such as Adive, Airbus, GIFAS, Confirming its commitments in this area, in 2012 Thales was one of the the ASTech competitiveness pole, Business France, Comité Richelieu very first large groups to be awarded the “Responsible Supplier Relations and Safran. Label” by the Médiation des Entreprises (business mediator) and the Since 2013, Pacte PME has produced a supplier relations quality Conseil National des Achats (French Purchasing Board). Awarded for a barometer for its “subcontracting company” members, with the period of three years for the French perimeter, this label singles out objective of involving the latter in an on- going improvement approach. companies committed to forging a structured collaborative relationship In 2015, 2016 and 2017, the barometer conducted on behalf based on mutual respect. To obtain this label, a prior external audit of of Thales, of a panel of 330 suppliers, highlighted a very high level purchasing procedures and action plans must be carried out; the various of satisfaction with the quality of relationships developed between the audits conducted on an annual review (2013, 2014, 2016 and 2017) Group and its partners. or triennial renewal (2015) basis have, since it was first obtained, consistently confirmed the award of this label to Thales. Finally, Thales is heavily involved in GIFA Industrial Performance programme aimed at improving performance of the French supply chain in terms of delivery and quality, improving the subcontracting company /supplier relationship, boosting the competitiveness of SME in the sector and developing employment in the industry. In 2017, 300 companies across France, grouped into clusters of five and seven suppliers and led by a subcontracting company, were set in motion; as part of this initiative, Thales steered seven clusters in Rhône-Alpes Auvergne, Bretagne, Île-de- France, Normandie, Nouvelle Aquitaine, Provence Alpes Côte d’Azur and Pays de Loire, comprising a total of around fifty suppliers. The initial stages of this programme generated excellent results, with 97% of the SME seeing a significant improvement

234 THALES — 2017 Registration Document Social information — Corporate responsibility

in their performance measured via one of the following criteria: Finally, as part of a multi-stakeholder dialogue, Thales takes part in punctuality, lead time delays and quality. numerous working groups on Human Rights, specifically aimed at improved consideration of the United Nations’ guidelines relating to Human Rights (known as the Ruggie Principles). 5.3.3.3 Duty of care Action to promote the environment of parent companies For many years, Thales has applied a responsible environmental policy. and subcontracting To this end, Thales has established and updated an environmental risk analysis based on the activities carried out, scientific and technical companies (law 2017- 399) developments and new challenges, which is in line with an overall procedure to manage these risks. The Group is also working to secure Since September 2001, the date of publication of Thales’s first Code of ISO 14001 certification for the industrial sites of subsidiaries across the Ethics, the Group has paid particular attention to the conduct of its world. To date, 124 sites covering 89% of the Group’s workforce are suppliers. This initiative was reinforced in 2003 when Thales formally certified. See Chapters 5.2.1.3 and 5.2.1.4.1 for more information. joined the United Nations Global Compact initiative (see below). Thales also applies the OECD Guidelines for multinational companies. Action related to personal health and safety These define the criteria for the responsible conduct of companies in With the health and safety of its employees a key priority for the Group, the areas of employment and business relations, environment, risk analysis has also been conducted in these areas for many years, anti-corruption, consumer interests, science and technology, competition aimed at ensuring that employees are not exposed to specific risks and and taxation. In addition, since 2008, as part of these commitments, analysing and anticipating the impact of new regulations. Risk mapping the Group has asked its suppliers to respect the ten principles stipulated, consolidates an overview of areas for improvement, which are particularly those relating to Human Rights, employment law and addressed via action plans both at Group level and locally. environmental protection. Coordinated by the Risk Assessment Committee, the process to manage During 2017, the implementation of law 2017- 399 of 27 March 2017 these risks likely to affect employees is monitored regularly. See Chapter on the duty of care of parent companies and subcontracting companies 5.1.5.2 for more information. has been discussed during meetings of the Ethics Corporate Responsibility Values shared with our suppliers and subcontractors Committee giving rise to the launch of ad hoc working groups. Thales’s strong attachment to respecting the principles of corporate This chapter specifies the actions undertaken for many years by Thales responsibility with regard to suppliers was conveyed in 2017 through the which will be integrated into the global duty of care plan to be approved continued deployment of the Purchasing and Corporate Responsibility during 2018 and presented in the 2018 Registration Document. Charter. Through this charter, the Group asks its suppliers across the world to adhere to its Corporate Responsibility approach and to respect 5.3.3.3.1 Action undertaken in terms both the principles of its Code of Ethics and those of the Global of duty of care Compact and the OECD. In particular, Thales raises their awareness to the issue of conflict minerals and the non- use of toxic substances. Action to support Human Rights and fundamental freedoms The companies concerned are also encouraged to fill in a self- assessment Thales signed the United Nations Global Compact in 2003 and questionnaire composed of sixteen questions: nine relating to labour complies with its ten principles relating to Human Rights, labour standards, three to environmental protection, two to governance, one to standards and environmental law inspired by the Universal Declaration business ethics and one to export control. of Human Rights and the International Labour Organization’s At end-2017, nearly 12,700 Thales suppliers (21% more than in 2016) Declaration on Fundamental Principles and Rights at Work. These ten had signed the Purchasing and Corporate Responsibility Charter and principles are applied on the basis of agreements and best practices completed the self- assessment questionnaire. On this basis, overall which ensure the Group’s business activities are compliant with supplier performance in terms of environmental, social and governance responsible conduct. As proof of the relevance of the actions taken in (ESG) criteria was rated 8.3 on a scale of 10. terms of corporate responsibility, in 2017, for the sixth year in a row, Thales achieved the Advanced level of the Global Compact differentiation programme which, with its 21 specific criteria, is the 5.3.3.3.2 Other aspects of the duty of care plan highest reporting and performance standard for responsible development. It should be noted that the Advanced level programme Risk mapping related to the duty of care required an external evaluation, which Thales successfully passed in a The main risks related to Thales’s activities are presented in Chapter peer review. Finally, of the 9,668 companies that are members of the 1.1.2 of this document entitled “Risk factors”. Some of these risks are Global Compact, only 447 obtained the Global Compact Advanced suitable for inclusion in the mapping of duty of care-related risks, in level in 2017, including 83 French companies. other words related to severe abuses of Human Rights, and damage to Thales also extends its own commitments in this area to its suppliers the health and safety of people and the environment. Also contributing (see 5.3.4.1.4 below). to this mapping will be the mechanisms to measure environmental risks or damage to the health and safety of people, as discussed above In order to ensure strict export control, both at a national and international (See Chapter 5.2.1.4.2). level, Thales has put in place a global organisation and constantly reinforces its internal measures and procedures. This strong commitment Thales has set up an ad hoc working group which assumes the main is intended to protect the national security of democratic States and roles concerned, to supplement, if necessary, this risk mapping in specifically to contribute to the fight against the spread of weapons of collaboration with other stakeholders, particularly within professional mass destruction. Accordingly, Thales and other European Aerospace bodies. This risk mapping will be used as a reference for the rollout of and defence companies support the United Nations Arms Trade Treaty, the duty of care plan. which came into force in late 2014. Alert mechanism Since 2004, Thales has also ceased all activity in the field of cluster The mechanism described in Section 5.3.2.1.4 above, open to munitions, opting to respond in a proactive manner to the expectations of the employees and third parties, is under review to incorporate potential NGOs involved in the field of Human Rights issues, as well as anticipating alerts in line with the law on the duty of care and will be finalised in the principles and definitions of the Convention on Cluster Munitions. 2018 in conjunction with the representative trade unions. 5

2017 Registration Document — THALES 235 Corporate responsibility — Social information

5.3.3.4 Thales initiatives with A coastal green belt to fight against natural disasters non- profit organisations in Sri Lanka The Consortium of Humanitarian Agencies (CHA) coordinates 5.3.3.4.1 Actions by the Thales Foundation humanitarian projects aimed at offering all Sri Lankans equal in 2017 opportunities in terms of development. Project: creation of environmentally- friendly plant barriers offering Through its foundation, launched in 2014, Thales is an innovative force the best chance of protection against the impacts of natural for the good of humanity and contributes to a response to the disasters and helping to fight drought in the island of Kayts, which challenges faced by society. To achieve this, the Thales Foundation has a population of over 10,000. (the Foundation) draws on the commitment of Thales’s employees, who can devote their motivation and skills to the benefit of the two overall themes chosen by the Foundation: education and humanitarian aid. 5.3.3.4.3 Les Savanturiers de l’ingénierie In the area of education, the Foundation develops projects relating to et du numérique: continuation science and innovation in teaching methods, prioritising children and of the pilot learning through research their teachers in order to increase students’ interest, curiosity and programme abilities in science. The goal is to give young people a taste for innovation and to make them more agile in an increasingly In September 2017, the Foundation renewed its support for the third fast- changing world. year running of the Savanturiers de l’ingénierie et du numérique pilot The Foundation is also involved in projects aimed at anticipating and engineering and digital technology programme. This approach based reducing the impact of natural and environmental disasters. Through on learning through research, conducted in class and sponsored by these actions, the Foundation helps to mitigate the vulnerability of Thales engineers, relies on the methods and ethics of research as a model populations located in risk areas by supporting risk prevention and for collaborative, ambitious learning methods. Students and teachers are preparedness and field mission programmes. supported by mentors to carry out their research and scientific project, transforming their classroom into a makeshift research laboratory. In three years, the Thales Foundation has supported more than 40 partners and 50 projects in around fifteen countries across the world, including 14 projects in 2017. The projects and actions of the Foundation have benefited from the voluntary support of 180 Group FOCUS: THE “SAVANTURIERS” YOUNG employees in 3 years. RESEARCHERS CONFERENCE IN 2017 To close the programme for the academic year, the Savanturiers 5.3.3.4.2 Eight new employee projects classes were invited to present the results of their research work supported in six countries in 2017 during end- of- year conferences in Cannes and Gennevilliers. Year 5 and Year 6 (CM1-CM2) students from Anatole France As part of the annual call for projects devoted to projects submitted school in Gennevilliers, supported by three young Thales by Group employees, eight organisations obtained financial support. engineers, captivated the auditorium with a presentation of their Of these projects, six of them with an educational theme focus primarily project: they gave a step-by- step explanation of the construction on combating and correcting the impact of social and economic and programming of a robot capable of dancing to music, while inequalities on educational success thanks to education on underlining all the qualities they had gained from this exercise, entrepreneurship or teaching on digital technology and IT. Two such as teamwork and perseverance. They orchestrated humanitarian risk projects were also launched in Sri Lanka and Nepal demonstrations and answered questions from their classmates, as well with the aim of helping local populations to prepare for the risks of as sharing their insight into the world of business by talking about their natural disasters to limit human and material damage. visit to the Thales Gennevilliers site and the Group’s activities. These projects had an impact on close to 15,000 young people and Richard Merra, Deputy Mayor of Gennevilliers, attested to the adults made aware of the different tools and methods to ensure their success of the programme: “I found this second edition of the continuity. Encouraged by the Foundation, some twenty Group employees Savanturiers to be even richer than the last one. There was notable offered voluntary support to these projects. pleasure from both the students and adults whose contributions went far beyond their professional remit. Thales’s engineers play a major role. The students feel it, they love to feel the importance of FOCUS: THREE WINNING PROJECTS their success through the eyes of others.” IN THREE COUNTRIES A mobile makerspace to learn by building a drone in France 5.3.3.4.4 Round Off Your Pay: a supplemented The Apprentis d’Auteuil foundation supports and trains young collection for five non- profit people with serious social, family and educational issues within organisations 200 establishments in France. Project: deployment of a mobile teaching cart containing the Launched in May 2016, the “round off your pay” initiative, designed technological tools to carry out practical work and build a drone, by the social outreach company microDON, allows every Thales thereby encouraging access to new technologies and an interest employee in France to support one of five charitable projects in key issues for 180 underprivileged high school students from presented, by donating the cents from their pay every month, with 5 establishments in Occitanie. an optional additional donation of up to €10 per month. All donations are paid to the charities, with Thales committing to match employees’ Lessons and IT resources for the Vellai Thamarai school in India contributions up to an annual ceiling. The micro- donations are Thanks to the support of the organisation Vellai Thamarai France, the obligation- free and participants can at any time change or cancel their Vellai Thamarai school in India works to promote the education and donation or choice of project. integration of a large underprivileged village community of Tamil Nadu. During 2017, this innovative outreach tool was used by 3,300 employee Project: implementation of lessons and IT equipment allowing micro-donors within the Group’s French companies, raising €240,000 the schoolteachers to become familiar with digital tools and 160 to support the following five charitable projects: young pupils to receive an induction in IT.

236 THALES — 2017 Registration Document Social information — Corporate responsibility

• Planète Urgence project to distribute school kits in several African Robot Obedience School is a learning platform which allows children countries; as young as six to programme robots. P- Tech is a mentoring programme to guide young people towards university studies and boost their Aide et Action project to create a learning platform and teaching • employability. Subs in schools gives high school students the opportunity tools to educate students in France and Senegal about community to work on a project to create a guided submarine in class. values; Canada • Bibliothèques Sans Frontières project to send “Ideas Box” media kits to children in low- income neighbourhoods in the South of France; As is the case every year, employees took action through campaigns of donations matched by Thales Canada for United Way to support Télécoms Sans Frontières project to re- establish communication • families in difficulty. networks following humanitarian crises; China • Pour Un Sourire d’Enfant to combat school dropout in Cambodia. Thales China Enterprise Management Co. Ltd. renewed its partnership Led by government-approved non-profit organisations, these five with the Cedar Foundation, an organisation which supports students projects enable the Foundation to support initiatives that spread its from isolated or underprivileged areas. Students had the opportunity to values and address social challenges. The Foundation commits to take part in visits to Thales premises, professional development promoting and monitoring each project to help it to achieve its objectives workshops and a mentoring programme to support them in their integration in terms of funding and results on the ground. into the workplace. United States ANTICIPATION IN THE PROVISION Thales USA gave its support to the innovative Iridescent Technovation OF SUPPORT TO EMERGENCY INTERVENTIONS Challenge programme: this international competition for young women BY TÉLÉCOMS SANS FRONTIÈRES IN 2017 (high school students) is aimed at developing their entrepreneurial and leadership skills. The participants are invited to identify an issue in their As soon as they are alerted to a natural disaster or humanitarian community, to develop a mobile application to solve it, then to communicate crisis, the teams of Télécoms Sans Frontières (TSF) are deployed in and transform their ideas into a viable business activity. less than three hours to REACh the ground and put in place crucial communication systems for the coordination and management of rescues The partnership with the Team America Rocketry Challenge was and the dispatch of humanitarian aid. In addition to providing renewed, allowing for the participation and selection of students for this support to humanitarian players, TSF offers free calls to populations international rocket launch competition which involves 4,000 students to communicate with and contact their loved ones. every year wishing to pursue a career in science. In 2017, Thales’ “round-off” collection contributed to three important Thales USA employees also contributed to voluntary mentoring actions, TSF missions in Madagascar (Cyclone Enawo), in Saint-Martin and a collection of educational supplies for the organisation Boys Town and Saint- Barthélemy (Hurricane Irma) and in Dominique (Hurricane food items for a social centre in Arlington. Maria). The reinstatement of telecommunications benefited more than Mexico 450 aid and humanitarian workers and more than 7,500 families. Following on from the support provided by the Thales Foundation in 2016, in Mexico, Thales Mexico and the SUM Foundation organised a new training session on innovation to support 60 young women aged 5.3.3.4.5 Other international examples between 14 and 21 to design and develop a project which responds to of local engagement initiatives an issue in their community. This educational innovation project is an opportunity to help these young women from problem neighbourhoods Many Group companies also support local and national organisations, to develop useful skills for future job roles, and in particular to offer them particularly in the areas of education and outreach to the underprivileged access to the world of science. or people with disabilities. They offer them financial and material support and invite Group employees to volunteer for the different charitable Following the powerful earthquake which hit Mexico in projects or actions. In many countries, a range of projects increase September 2017, causing almost 230 deaths, Thales supported actions Thales’s contribution to education in science, technology, engineering to offer aid to victims of the Mexican Red Cross through donations of and mathematics (1). money, medication and food items. Australia Netherlands Thales Australia has significantly increased its impact with five new More than 60 visits of Thales sites in the Netherlands were organised in projects to promote access for young people to science, technology and 2017 to welcome more than 1,000 students and school pupils with a the digital world, allowing them to learn by doing, to play their part in view to encouraging them to consider a career in industry and technology and to work towards careers in industry and technology. technology. These actions benefit from the support and volunteering of Thales Thales Netherlands actively supported the participation of a team of employees and promote links between education and industry. international students in the World Solar Challenge Australia, an The main partnership was signed with the Commonwealth Scientific innovative challenge focused on the issue of sustainable technological and Industrial Research Organisation (CSIRO) for three years, in relation development and improved performance: advised and coached by to two programmes conducted in Australian schools. The aim is to Thales experts for two years, the team had the opportunity to design support students in developing scientific thinking, the ability to conceive and build its own solar- powered vehicle to compete in the race in and conduct research work, to solve problems and to communicate Australia. effectively. Thanks to Thales’s involvement, they gain a better United Kingdom understanding of the industrial world and of the importance of science and technology. Thales’s aim in the United Kingdom is to inspire, inform and involve young people through initiatives aimed at offering them the necessary A programme providing an introduction to computer programming, skills and knowledge to make an informed decision as to their personal CoderDojo, allows young people aged 7 to 17 to take free workshops and professional choices. run by employee volunteers during the weekends on a Thales site. 5 (1) STEM education, in English- speaking countries.

2017 Registration Document — THALES 237 Corporate responsibility — Social information

In 2017, Thales UK worked with more than 45 schools and colleges to • the International Chamber of Commerce (ICC); organise activities to meet their needs, and in support of young people • the Mouvement des Entreprises de France (the French employers’ within its local communities. As a partner of the Primary Engineers confederation (MEDEF)): International Committee, CSR Committee, programme, Thales UK supported the training of 40 teachers to Ethics and Guiding Principles Committee, Economic Intelligence implement long- term scientific projects in primary schools in the Committee, Internationalisation Committee, Sustainable Development south-east of England. As part of the Tomorrows Engineers programme, Division; Thales took part in various events of the Big Bang, a major national • the Association Française des Entreprises Privées (the French Association event to raise awareness on science and engineering which is attended of Private Companies (AFEP)); by more than 70,000 young people each year. • French investor relations association CLIFF; the Aerospace and Defence Industries Association of Europe (ASD); Through a partnership with the UK organisation of voluntary scientific • the Aerospace Industries Association of America (AIA); ambassadors (STEM volunteers), Thales UK rallied more than 200 • the Groupement des Industries Françaises Aéronautiques et Spatiales employees trained to promote opportunities in science and technology • (the Group of French Aeronautic and Space Industries (GIFAS)); in the United Kingdom. • the US-based ethics and integrity body Defense Industry Initiative (DII); Singapore/ Cambodia, the Philippines, Vietnam • various forums set up by the main British companies in the defence industry, including UK National Defence Business Ethics Forum, ADS Thales Asia continued its partnership with Passerelles numériques, an Supply Chain 21 Task Force, Institute of Business Ethics; organisation which offers underprivileged young people in Cambodia, the Ethics Network Australian Defence Industry (ENADI); the Philippines and Vietnam access to a qualified job in the new • the Observatoire sur la Responsabilité Sociétale des Entreprises technology sector. Through this partnership, Thales funded the • (Centre for Corporate Social Responsibility (ORSE)); education of 20 students for two years until they achieved their IT le Cercle d’Éthique des Affaires (Business Ethics Circle (CEA)); diploma in addition to outreach leave assignments for employees • the International Aerospace Environmental Group (IAEG), board member; wishing to offer their skills to the organisation. • • the Association pour la promotion de la Conformité Réglementaire Santé Sécurité Environnement (Association for the Promotion of 5.3.3.5 Partnerships with Compliance with Health, Safety and Environmental Regulations (ACORES)). professional, international Thales plays an active role in the work of these organisations. and non- governmental The Group is also a founding member and joint chair of the International organisations Forum on Business Ethical Conduct (IFBEC), whose last worldwide forum took place in Washington in October 2017. Through partnerships with numerous organisations, Thales has been In the United States, in 2002, Thales was the first non-US company to able to share its best practices with other companies, to anticipate sign the Defense Industry Initiative. In the United Kingdom, the Group’s changes in regulations and standards, and to promote the conditions UK subsidiary was one of the first members of the UK National Defence for equal competition among the players in its business segment. Business Ethics Forum (formerly known as the Defence Industry In this regard, Thales works closely with numerous bodies, including: Anti-Corruption Forum), set up by the main defence companies present in the country and by the industry’s professional associations. • the United Nations, and specifically the UN Global Compact; in 2017, for the sixth year running, Thales achieved Global Thales also pursues a policy of regular, high-quality dialogue with its Compact Advanced level in the UN Global Compact differentiation stakeholders, including the financial community, socially responsible programme; Thales confirms its involvement in this initiative through investment funds, ratings agencies and non- financial analysts. its regular involvement in the work of the “Global Compact Finally, Thales maintains regular contact with NGOs such as Transparency Advanced” club and the Droits Humains (Human Rights) club of the International, particularly on matters related to business ethics, and Global Compact France; Amnesty International and Saferworld on the question of Human Rights. • the Organisation for Economic Cooperation and Development (OECD); • the European Commission;

238 THALES — 2017 Registration Document Social information — Corporate responsibility

5.3.4 Social indicators

Description 2017 data Comments/ References

Number of 111 Corruption risk, just like the other major risks on the Group’s risk map, is an integral part of the overall Thales operational entities risk management system. As part of the Group’s self- assessment and internal control policy, the 111 main that assessed risks operational entities conducted a self-assessment of their exposure to the risk of corruption and, in certain of corruption cases, defined an action plan with a view to continually improving the system. See the section on Internal control and risk management – Ongoing improvement process – Self-assessment and ongoing improvement of corporate risk management.

Communication and 1,035 The benchmark training is delivered by multilingual trainers who are specialists in the field of ethical business training with regard conduct. Lasting four hours, the course takes place either on the Thales Learning Hub campuses across the world to anti-corruption or directly on site. Other ad hoc training is also given in specific environments, such as for senior executives policies and procedures and country teams. In addition, an e-learning programme comprising three 30-minute modules (in French, English and German) is available to all Group employees, with the potential addition of country initiatives; 2,500 learners completed one or more modules in 2017.

Proven cases None Since 2004, a global professional alert mechanism has been in place within Thales. During 2017, this mechanism of corruption and was reviewed with a view to meeting the requirements of the Sapin II law, the new European regulation on measures taken personal data protection which will enter into force on 25 May 2018 and law 2017- 399 on the duty of care of parent companies and subcontracting companies. Certain countries in which Thales has a significant presence have supplemented this system with a local whistle- blowing system, notably the United Kingdom, the United States and Australia. None of the incidents reported in 2017 concerned a proven case of corruption.

The overall system is completed by Thales’s active participation in various initiatives in the fight against corruption. Thales also actively participates in national professional organisations (including MEDEF, GIFAS and ADS (1)) and international organisations (Business Ethics committee of ASD (2), ICC (3), B20 (4), IFBEC (5), etc.) dealing with business ethics, and has an active presence within the working groups of intergovernmental organisations (OECD, United Nations, etc.).

(1) Association of UK Aerospace, Defence Security & Space Industries. (2) Aerospace and Defence Industries Association of Europe. (3) International Chamber of Commerce. (4) International business community bringing together 22 employer organisations. 5 (5) International Forum on Business Ethical Conduct.

2017 Registration Document — THALES 239 Corporate responsibility — Report by the Independent third party on the consolidated human resources, environmental and social information included in the management report

5.4 REPORT BY THE INDEPENDENT THIRD PARTY ON THE CONSOLIDATED HUMAN RESOURCES, ENVIRONMENTAL AND SOCIAL INFORMATION INCLUDED IN THE MANAGEMENT REPORT

This is a free English translation of the Independent third party’s report issued in French and is provided solely for the convenience of English-speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France.

To the Shareholders, I. Attestation regarding the completeness of CSR Information In our capacity as independent third party, certified by COFRAC number 3- 1058 (scope available at www.cofrac.fr), and member of Nature and scope of our work the Mazars network of one of the Company’s statutory auditors, we On the basis of interviews with the individuals in charge of the relevant hereby report to you on the consolidated human resources, departments, we obtained an understanding of the Company’s environmental and social information for the year ended sustainability strategy regarding human resources and environmental 31 December 2017, included in the management report (hereinafter impacts of its activities and its social commitments and, where named “CSR Information”), pursuant to Article L. 225- 102-1 of the applicable, any actions or programmes arising from them. French Commercial Code (Code de commerce). We compared the CSR Information presented in the management Company’s responsibility report with the list provided in Article R. 225-105- 1 of the French Commercial Code. The Board of Directors is responsible for preparing a company’s management report including the CSR Information required by Article For any consolidated information that is not disclosed, we verified that R. 225-105- 1 of the French Commercial Code in accordance with the explanations were provided in accordance with Article R. 225-105, reporting criteria used by the Company (hereinafter the “Reporting paragraph 3 of the French Commercial Code. Criteria”), summarised in the management report and available on We verified that the CSR Information covers the scope of consolidation, request from the Company’s head office. i.e., the Company, its subsidiaries as defined by Article L. 233-1 and the controlled entities as defined by Article L. 233- 3 of the French Independence and quality control Commercial Code within the limitations set out in the methodological Our independence is defined by regulatory texts, the French Code of note, presented in the Sections 5.2.8 “Environmental reporting rules” and Ethics (Code de déontologie) of our profession and the requirements of the “Methodological note” of Sections 5.1 in the management report. Article L. 822-11- 3 of the French Commercial Code. In addition, we have implemented a system of quality control including documented Conclusion policies and procedures regarding compliance with the ethical Based on the work performed and given the limitations mentioned requirements, French professional standards and applicable legal and above, we attest that the required CSR Information has been disclosed regulatory requirements. in the management report. Responsibility of the Independent Third-Party II. Conclusion on the fairness of CSR Information On the basis of our work, our responsibility is to: Nature and scope of our work attest that the required CSR Information is included in the • We conducted about fourty interviews with the persons responsible for management report or, in the event of non- disclosure of a part or all preparing the CSR Information in the departments in charge of of the CSR Information, that an explanation is provided in collecting the information and, where appropriate, responsible for accordance with the third paragraph of Article R. 225-105 of the internal control and risk management procedures, in order to: French Commercial Code (Attestation regarding the completeness of CSR Information); • assess the suitability of the Guidelines in terms of their relevance, completeness, reliability, neutrality and understandability, and taking express a limited assurance conclusion that the CSR Information • into account industry best practices where appropriate; taken as a whole is, in all material respects, fairly presented in accordance with the Guidelines (Conclusion on the fairness of CSR • verify the implementation of data-collection, compilation, processing Information). and control process to REACh completeness and consistency of the CSR Information and obtain an understanding of the internal control It is however not our responsibility to attest compliance with other legal and risk management procedures used to prepare the CSR dispositions where appropriate, in particular those included in Article Information. L. 225- 102-4 of the French Commercial Code (vigilance plan of parent companies) and law n° 2016-1691, dated December 9th, 2016, said We determined the nature and scope of our tests and procedures Sapin II (fight against corruption). based on the nature and importance of the CSR Information with respect to the characteristics of the Company, the human resources and Our work involved 9 persons and was conducted between end of environmental challenges of its activities, its sustainability strategy and October 2017 and February 2018 during a 14 week period. industry best practices. We performed our work in accordance with the French professional Regarding the CSR Information that we considered to be the most standards and with the order dated 13 May 2013 defining the important (2): conditions under which the independent third party performs its engagement and with ISAE 3000(1) concerning our conclusion on the • at Group level, we referred to documentary sources and conducted fairness of CSR Information. interviews to corroborate the qualitative information (organisation, policies, actions), performed analytical procedures on the quantitative information and verified, using sampling techniques, the

240 THALES — 2017 Registration Document Report by the Independent third party on the consolidated human resources, environmental and social information — Corporate responsibility included in the management report

calculations and the consolidation of the data. We also verified that We also assessed the relevance of explanations provided for any the information was consistent and in agreement with the other information that was not disclosed, either in whole or in part. information in the management report; We believe that the sampling methods and sample sizes we have used, • at the level of a representative sample of entities selected by us (3)on based on our professional judgement, are sufficient to provide a basis the basis of their activity, their contribution to the consolidated for our limited assurance conclusion; a higher level of assurance would indicators, their location and a risk analysis, we conducted have required us to carry out more extensive procedures. Due to the use interviews to verify that procedures are properly applied, and we of sampling techniques and other limitations inherent to information and performed tests of details, using sampling techniques, in order to internal control systems, the risk of not detecting a material misstatement verify the calculations and reconcile the data with the supporting in the CSR information cannot be totally eliminated. documents. The selected sample represents on average 56% of headcount considered as material data (4)of social issues and Conclusion between 22% and 76% of quantitative environmental data Based on the work performed, no material misstatement has come to considered as material data of environmental issues. our attention that causes us to believe that the CSR Information, taken as For the remaining consolidated CSR Information, we assessed its a whole, is not presented fairly in accordance with the Guidelines. consistency based on our understanding of the Company.

Paris-La Défense, 5 March 2018 The Independent Third- Party Mazars Anne-Laure Rousselou Edwige Rey Partner CSR & Sustainable development Partner

(1) ISAE 3000 – Assurance engagements other than audits or reviews of historical financial information.

(2) Environmental Information: Electricity consumption, Annual fossil energy consumption, Water consumption, GHG (greenhouse gas) emissions: GHG emissions from energy consumption (CO2),

GHG emissions from substances (CO2), GHG emissions from transportation (business travels – CO2); Industrial Wastewater Discharges, Common waste production (excluding exceptional items), hazardous waste production (excluding exceptional items), common waste recovery (%), hazardous waste recovery (%). Human Resources Information: Global workforce as 31 / 12 /2017, Women/ men breakdown (%), workforce by age, Recruitments, Redundancies, Total number of training hours, Absenteeism rates, Actions in favor of gender equality, Attractiveness policy, professional development of employees Social information: Overall performance of suppliers in ESG responsibility, Communication and training on policies and procedures in the fight against corruption, Part of class A suppliers evaluated on HSE criteria, Number of sites that have been subjected to an assessment of risks of corruption and substantial risks identified, Global organization for listening and managing the quality of customer relation (3) Environmental Information: Thales Communications & Security, Thales Alenia Space (Rome), Thales Alenia Space (Charleroi), Thales Underwater Systems (Templecombe Hub), Thales Land Australia (Mulwala), Thales Electron Devices (Thonon), Thales Communications & Security (Laval), TDA Armements (La Ferté), Thales Research & Technology (Palaiseau).

In addition to environmental information (fuel consumption and GHG emissions from substances (CO2)): TED Vélizy Human resources Information: Legal entities of Thales France and Thales Canada Social Information: law / Human Resources Department, Ethics & Corporate Responsibility Department, Relationship suppliers Director, Quality & Customer Satisfaction Department Détailler les sites concernés dans le corps du rapport ou en note de bas de page 5 (4) See environmental information considered to be the most important.

2017 Registration Document — THALES 241 Corporate responsibility — Table of reconciliation (Articles L. 225-102-1 and R. 225-105-1 of the French Commercial Code)

5.5 TABLE OF RECONCILIATION (ARTICLES L. 225-102-1 AND R. 225-105-1 OF THE FRENCH COMMERCIAL CODE)

In accordance with the Articles L. 225-102-1 and R. 225-105-1 of the French Commercial Code on transparency obligations for companies on social and environmental matters, Thales provides information in its management report on the Group’s social, environmental and societal issues. An independent verifier issued a declaration of inclusion and a limited assurance report on consolidated social, environmental and societal information.

Page Section

1) SOCIAL INFORMATION 200 5.1 HUMAN RESOURCES INFORMATION

a) Employment 5.1.1 A responsible employment policy

Total workforce and breakdown of employees 200 5.1.1.1 Employment in the Group by gender, age and geographical area 212 5.1.6 Gender equality and diversity Recruitments and redundancies / dismissals 202 5.1.1.2 Recruitment 202 5.1.1.3 Departures Remuneration and salary progression 209 5.1.4 A Group employee profit-sharing policy

b) Organisation of work Organisation of working hours 212 5.1.5.5 Working time Absenteeism 211 5.1.5.3 Information on work-related accidents and absenteeism

c) Employee relations Organisation of social dialogue, especially procedures 204 5.1.2.1 Collective bargaining for providing information to and consulting with staff 205 5.1.2.2 Appropriate labour relations bodies and negotiating with them Summary of collective agreements

d) Health & safety Health and safety conditions at work 210 5.1.5 A safe and healthy working environment: Summary of health and safety agreements entered into workplace health and safety with trade union organisations or employee representatives with regard to health and safety at work Frequency and severity of work-related accidents 211 5.1.5.3 Information on work-related accidents and absenteeism and sick leave and occupational influences

e) Training Policies implemented for training 207 5.1.3.5 Training Total number of training hours

f) Equal opportunities Measures taken to promote gender equality 212 5.1.6 Gender equality and diversity Measures taken to promote the employment 214 5.1.6.2.3 Disabled employment around the world and integration of disabled persons 214 5.1.6.2.4 Disabled employment in France 231 5.3.1.2 Group initiative to support people with disabilities Anti-discrimination policy 212 5.1.6 Gender equality and diversity 213 5.1.6.2 Diversity

g) Promotion of and compliance with the International Labour Organisation fundamental conventions: Respect for freedom of association 210 5.1.5 A safe and healthy working environment: and right to collective bargaining workplace health and safety Elimination of discrimination in respect of employment and occupation Elimination of forced or compulsory labour 212 5.1.6 Gender equality and diversity Effective abolition of child labour

242 THALES — 2017 Registration Document Table of reconciliation (Articles L. 225-102-1 and R. 225-105-1 of the French Commercial Code) — Corporate responsibility

Page Section

2) ENVIRONMENTAL INFORMATION 217 5.2 ENVIRONMENTAL INFORMATION a) General policy 217 5.2.1 General policy on environmental issues Organisation of the Company to take account 218 5.2.1.2 Commitment from employees of environmental questions and, if applicable, 219 5.2.1.4 Management and prevention environmental assessment and certification processes of environmental risks and pollution Employee training and information training 218 5.2.1.2.2 Employee training and information initiatives on protection of the environment Measures taken to prevent 219 5.2.1.4 Management and prevention environmental risks and pollution of environmental risks and pollution Amount of provisions and guarantees 220 5.2.1.5 Guarantees, provisions and compensation set aside for environmental risks b) Pollution and waste management 221 5.2.2 Pollution and waste management Measures taken to prevent, reduce and 221 5.2.2.2 Fighting pollution clean up discharges into the air, water 221 5.2.3.1 Industrial wastewater discharge and soil seriously affecting the environment 229 5.2.7 Environmental indicators Measures taken to prevent, recycle and eliminate waste 222 5.2.3.2 Waste prevention and management 229 5.2.7 Environmental indicators Mitigation of noise and other forms 221 5.2.2.2 Fighting pollution of pollution related to a business activity c) Sustainable use of resources 221 5.2.3 Circular economy Water consumption and supply 221 5.2.3.1 Sustainable use of resources in accordance with local constraints 229 5.2.7 Environmental indicators Consumption of raw materials and measures 221 5.2.3.1.2 Consumption of raw materials taken to improve efficiency of their use 222 5.2.3.2 Waste prevention and management 226 5.2.6.1 Environment and products Energy consumption, measures taken to improve 222 5.2.3.1.3 Energy consumption energy efficiency and use of renewable energy 229 5.2.7 Environmental indicators Land use 222 5.2.3.3 Land use d) Climate change 223 5.2.4 Fighting climate change Greenhouse gas emissions 223 5.2.4.2 Reduction of greenhouse gas emissions from operations 229 5.2.7 Environmental indicators Adaptation to the consequences of climate change 224 5.2.4.3 Contribution to fighting climate change e) Protection of biodiversity 225 5.2.5 Protection of biodiversity Measures taken to preserve and develop biodiversity 225 5.2.5 Protection of biodiversity

3) INFORMATION ON SOCIETAL COMMITMENTS IN FAVOUR OF SUSTAINABLE DEVELOPMENT 231 5.3 SOCIAL INFORMATION a) Territorial, economic and social 231 5.3.1 Territorial, economic and social impact impact of the Company’s activities of the Group’s activities With regard to regional employment and 231 5.3.1.1 The Group’s regional policies in France development on resident or local populations b) Relations with people or organisations 233 5.3.3 Relations between Thales and its stakeholders with an interest in the Company’s activities, especially associations for inclusion, teaching establishments, associations for defence of the environment, consumer associations and local residents’ associations Conditions for dialogue with these people or organisations 238 5.3.3.5 Partnerships with professional, International and non-governmental organisations Partnership or sponsorship operations 204 5.1.1.4.4 Educational partners and links with schools and students 207 5.1.3.5 Training 225 5.2.4.3.3 Defining international standards 225 5.2.4.3.4 Partnerships 225 5.2.5 Protection of biodiversity 236 5.3.3.4 Thales initiatives with non-profit organisations 5

2017 Registration Document — THALES 243 Corporate responsibility — Table of reconciliation (Articles L. 225-102-1 and R. 225-105-1 of the French Commercial Code)

Page Section

c) Subcontractors and suppliers 234 5.3.3.2 Supplier relations: a responsible approach Recognition of social and environmental 219 5.2.1.3.1 Involving suppliers issues in the procurement policy 234 5.3.3.2 Supplier relations: a responsible approach Importance of subcontracting and recognition 219 5.2.1.3.2 Relations with other stakeholders of subcontractors’ and suppliers’ corporate 215 5.2.4.3.3 Defining international standards responsibility in relations with them 225 5.2.4.3.4 Partnerships 225 5.2.5 Protection of biodiversity 234 5.3.3 Supplier relations: a responsible approach

d) Fair business practices 232 5.3.2 Fair business practices Action undertaken to prevent corruption 232 5.3.2.1 Anti-corruption 239 5.3.4 Social indicators Measures taken to ensure consumer health and safety 233 5.3.2.2 Consumer health and safety

e) Other actions undertaken to promote Human Rights 232 5.3.2 Fair business practices 235 5.3.3.3 Duty of care of parent companies and subcontracting companies (law 2017-399)

210 5.1.5 A safe and healthy working environment: 212 5.1.6 workplace health and safety 226 5.2.6.2 Gender equality and diversity 235 5.3.3.3.1 Eco-responsible products and innovation 240 5.4 Actions to support Human Rights Statutory auditors’ Independent Third-party report on consolidated social, environmental and societal information published in the management report

244 THALES — 2017 Registration Document Declaration from the person responsible for© —the Corporate Registration responsibility Document

DECLARATION FROM THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT

I hereby certify that, after having taken all reasonable measures to this effect, to the best of my knowledge, the information contained in this Registration Document is accurate and does not omit any material fact.

I certify that, to the best of my knowledge, the financial statements have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities, financial position and results of the Company and of all the entities taken as a whole included in the consolidation, and that the management report included on page 8 a fair view of the development and performance of the business and financial position of the Company and of all the entities taken as a whole included in the consolidation, as well as a description of the main risks and uncertainties to which they are exposed.

I have received a letter from the statutory auditors confirming that they have completed the work they undertook to audit the information related to the financial situation and the financial statements included in this document, as well as a review of this document in its entirety.

The historic financial information presented in this Registration Document is the subject of reports from the statutory auditors. The report on the consolidated financial statements for 2017 on pages 80 to 83 has been issued without reservation and the parent company financial statements report for 2017 on pages 116 to 118 has been issued without reservation and include one observation. The reports on the consolidated financial statements for 2015 and 2016, included by reference in this 2017 Registration Document, were issued without reservation.

Paris-La Défense, 30 March 2018

Patrice Caine Chairman and CEO

5

2017 Registration Document — THALES 245 European Cross-Reference table

EUROPEAN CROSS-REFERENCE TABLE (ANNEX 1 OF THE EUROPEAN REGULATION NO. 809/ 2004)

To facilitate reading of this Registration Document, the following European Cross-Reference table allows the identification of the main information required by Annex 1 of the European Regulation No. 809 / 2004.

EC Regulation No. 809/ 2004

No. Heading Page

1. Persons responsible 1.1 Persons responsible for the information given in the Registration Document 245 1.2 Declaration by persons responsible for the Registration Document 245

2. Statutory auditors 2.1 Names and addresses of the Company’s statutory auditors 173 2.2 Statutory auditors having resigned, been removed or not having been re-appointed during the period covered N / A

3. Selected financial information 3.1 Selected historical financial information 4, 5, 115 3.2 Selected financial information for interim periods N /A

4. Risk factors 17 to 28

5. Information about the issuer 5.1 History and development of the Company 4, 5 5.1.1 Legal and commercial name of the Company 176 5.1.2 Place of registration of the Company and its registration number 176 5.1.3 Date of incorporation and length of life of the Company 176 5.1.4 Domicile and legal form of the Company, the legislation under which the Company operates, its country of incorporation, and the address and telephone number of its registered office 176 5.1.5 Important events in the development of the Company’s business 4, 5 5.2 Investments 5.2.1 Principal investments realised by the Company for each financial year for the period covered by the historical financial information up to the date of the Registration Document 40, 47 5.2.2 Principal investments of the Company which are in progress N /A 5.2.3 Principal future investments on which the Company’s management bodies have already made firm commitments 17

6. Business overview 6.1 Principal activities 120 to 137 6.1.1 Nature of the Company’s operations and its principal activities 120 to 137 6.1.2 Significant new products or services introduced 120 to 137 6.2 Principal markets 120 to 137 6.3 Exceptional events influencing the information given pursuant to items 6.1. and 6.2. N / A 6.4 Extent to which the Company is dependent on patents or licences, industrial, commercial or financial contracts, or new manufacturing processes 24, 132 6.5 Basis for statements made by the Company regarding its competitive position 120 to 137

7. Organisational structure 7.1 Description of the Group and the Company’s position within the Group 2, 3, 133, 134 7.2 List of the Company’s significant subsidiaries 135

246 THALES — 2017 Registration Document European Cross-Reference table

No. Heading Page

8. Property, plant and equipment 8.1 Existing or planned material tangible fixed assets 137 8.2 Environmental issues that may affect the Company’s utilisation of the tangible fixed assets 19, 108, 217 to 230

9. Operating and financial review 9.1 Financial condition, changes in financial condition and results of operations for each year and interim period for which historical financial information is required 8 to 7 9.2 Operating income 8 to 7 9.2.1 Significant factors, including unusual or infrequent events or new developments, materially affecting the Company’s income from operations 8 to 7 9.2.2 Reasons for material changes in net sales or sales N / A 9.2.3 Governmental, economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the Company’s operations 8 to 28

10. Capital resources 10.1 Information concerning the Company’s capital resources (both short and long term) 15, 39, 63 10.2 Sources and amounts and description of the Company’s cash flows 15, 40, 53, 54 10.3 Information on the borrowing requirements and funding structure of the Company 40, 52 to 60, 197 10.4 Information regarding any restrictions on the use of capital resources that have materially affected, or could materially affect, directly or indirectly, the Company’s operations 24 to 27, 52 to 60 10.5 Information regarding the anticipated sources of funds needed to fulfil commitments referred to in items 5.2.3. and 8.1. 177, 197

11. Research and development, patents and licences

12. Trend information 12.1 Significant trends in production, sales and inventory, and costs and selling prices since the end of the last financial year to the date of the Registration Document N /A 12.2 Known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the Company’s prospects for at least the current financial year 17

13. Profit forecasts or estimates N / A

14. Administrative, management and supervisory bodies and senior management 140 14.1 Members of the administrative and management bodies 140 to 147, 168 14.2 Administrative, management and supervisory bodies and senior management conflicts of interests, and any arrangement or understanding reached 147, 151

15. Remuneration and benefits 15.1 Amount of remuneration paid and benefits in kind granted by the Company and its subsidiaries 156 à 167, 169 to 172, 187 15.2 Total amount set aside or accrued by the Company or its subsidiaries to provide pension, retirement or similar benefits 66 to 69, 167

16. Board practices 16.1 Date of expiration of the current term of office and period during which the person has served in that office 149 16.2 Information about members of the administrative, management or supervisory bodies’ service contracts with the Company or any of its subsidiaries providing for benefits upon termination of employment, or an appropriate negative statement 189 16.3 Information about the Company’s audit committee and Remuneration Committee 152 to 154 16.4 Statement as to whether or not the Company complies with the corporate governance regime in operation in its country of incorporation 148, 160

5

2017 Registration Document — THALES 247 European Cross-Reference table

No. Heading Page

17. Employees 17.1 Number of employees at the end of the period or the average for each financial year for the period covered by the historical financial information, and breakdown of persons employed by main category of activity and geographic location 66, 137, 200 to 217 17.2 Shareholdings and stock options. Information as to share ownership and options of Company directors 160 to 163, 169 to 172 17.3 Arrangements for involving the employees in the capital of the Company 172

18. Major shareholders 18.1 Name of any person, other than a member of the administrative, management or supervisory bodies who, directly or indirectly, has an interest in the Company’s capital or voting rights which must be disclosed under the applicable national law, together with the amount of such interest or, if there are no such persons, an appropriate negative statement 175 à 188 18.2 Whether the Company’s major shareholders have different voting rights, or an appropriate negative statement 155 18.3 Direct or indirect ownership or control of the Company 179 to 182 18.4 Description of any arrangements, known to the Company, the operation of which may, at a subsequent date, result in a change in control of the Company N /A

19. Related party transactions

20. Financial information concerning the issuer’s assets and liabilities, financial position and profits and losses 20.1 Historical financial information 4, 115, 177 20.2 Pro forma financial Information N /A 20.3 Financial statements 35 to 40, 80, 84 to 115 20.4 Auditing of historical annual financial information 20.4.1 Statement that the historical financial information has been audited 80, 116 20.4.2 Other information in the Registration Document which has been audited by the auditors 189, 240 20.4.3 Indication of the source of financial data in the Registration Document which is not extracted from the Company’s audited financial statements and a statement that this data is unaudited N /A 20.5 Age of latest audited financial information 42 20.6 Interim and other financial information N /A 20.7 Dividend policy 8, 15 20.7.1 Dividend per share 4, 8 20.8 Legal and arbitration proceedings 24, 74 20.9 Significant change in the financial or trading position N /A

248 THALES — 2017 Registration Document European Cross-Reference table

No. Heading Page

21. Additional information 21.1 Share capital 21.1.1 Amount of issued capital, number of shares authorised, number of shares issued and fully paid, and issued but not fully paid, par value per share, and reconciliation of the number of shares outstanding at the beginning and end of the year 177 to 179 21.1.2 Shares not representing capital N /A 21.1.3 Number, book value and par value of shares in the Company held by or on behalf of the Company itself or by its subsidiaries 182 to 184 21.1.4 Amount of convertible, exchangeable or cum warrant securities N /A 21.1.5 Information about the terms of any acquisition rights or obligations over authorised but unissued capital or an undertaking to increase the capital 179 21.1.6 Information about the capital of any member of the Group which is under option or agreed conditionally or unconditionally to be put under option N /A 21.1.7 History of share capital for the period covered by the historical financial information 177 21.2 Memorandum and Articles of Association 176 21.2.1 Corporate purpose 176 21.2.2 Members of the administrative, management and supervisory bodies 140 to 147, 168 21.2.3 Rights, preferences and restrictions attaching to each class of the existing shares 176 to 179 21.2.4 Action necessary to change the rights of shareholders 177 21.2.5 Conditions governing the manner in which Annual General Meetings and Extraordinary General Meetings of Shareholders are called, including the conditions of admission 155 21.2.6 Any provisions of the Company’s memorandum and Articles of Association, charter or bylaws that would have the effect of delaying, deferring or preventing a change in control of the Company 180 to 182 21.2.7 Any provisions of the Company’s memorandum and Articles of Association, charter or bylaws governing the ownership threshold above which share ownership must be disclosed 181 21.2.8 Conditions imposed by the memorandum and Articles of Association, charter or bylaws governing changes in the capital, where such conditions are more stringent than is required by law 179 to 182

22. Material contracts (other than contracts entered into in the ordinary course of business) N / A

23. Third party information, statements by experts and declarations of interest 23.1 Information about persons issuing statements or reports 173 23.2 Confirmation that information has been faithfully reproduced and that no facts have been omitted which would render the reproduced information inaccurate or misleading N /A

24. Documents on display 196

25. Information on holdings 38, 50, 54, 93, 112, 113

5

2017 Registration Document — THALES 249 Changes made to 2017 Registration Document structure

CHANGES MADE TO 2017 REGISTRATION DOCUMENT STRUCTURE

Pursuant to Order No. 2017-1162 of 12 July 2017 and Decree No. 2017-1174 of 18 July 2017 (1), the following changes were made to the structure of the Thales Registration Document for financial year 2017: • the description of internal control and risk management procedures, which appeared in the Chairman’s Report (Section 3.2.2 of the 2016 Registration Document, p. 137 and thereafter) has been moved in the Group Management Report, to Section 1.1.3 of the 2017 Registration Document; • conversely, the Corporate Governance Report, which now replaces the Chairman’s Report, includes in its Section 3.2.2 all compensation factors for company representatives, which are listed in Section 3.5.1 of the 2016 Registration Document; • similarly, this Corporate Governance Report, in Section 3.2.1.6 of the 2017 Registration Document, includes certain factors previously included in the Group or parent company management report, i.e., • the summary table of current valid delegations granted by the general shareholders’ meeting with regard to capital increases (Section 4.3.3.9 of the 2016 Registration Document, • a detailed description of the principal factors likely to have an impact in the event of a public offering (Section 4.3.3.10 of the 2016 Registration Document); • the description of any agreements entered into between Thales subsidiaries and related parties (2), if they do not correspond to current agreements entered into under normal conditions (included under Section 4.4 of the 2016 Registration Document). This new Section 3.2.1.6 also sets forth the specific conditions for shareholder participation in the general shareholders’ meeting, which for the sake of consistency, now include most elements of Section 4.2 “General Shareholders’ Meetings” of the 2016 Registration Document. The remainder of the text of this former Section 4.2, relating to statements involving exceeding statutory thresholds, is included in Section 4.1 (general company information) of the 2017 Registration Document, Section 4.2 “General Shareholder Meetings” of the 2016 Registration Document, has not been retained in the 2017 Registration Document, and Section 4 of the latter has been renumbered.

(1) Order and decree providing various measures for simplification and clarification of the reporting obligations for which companies are responsible. (2) Agreements entered into directly or through an intervening third party between, on the one hand, a company representative or shareholder holding a percentage of voting rights greater than 10% of a company, and, on the other hand, another company in which the former directly or indirectly holds more than half the share capital.

250 THALES — 2017 Registration Document THALES_VA_V1_27-03-18_08H00 Annual Financial Report reconciliation table

ANNUAL FINANCIAL REPORT RECONCILIATION TABLE

To facilitate reading of the Registration Document, the following table allows the identification of information that constitutes the Annual Financial Report in accordance with Article L. 451-1-2 of the French Monetary and Financial Code and Article 222-3 of the AMF General Regulations.

Parent company financial statements 88 Consolidated financial statements 35 Parent company management report 84 Group management report 8 Statutory auditors’ report on the parent company financial statements 116 Statutory auditors’ report on the consolidated financial statements 80 Declaration from the person responsible for the Registration Document 245 Board of Directors’ report to the Annual General Meeting of 23 May 2018 on corporate governance and internal control 148 Statutory auditors’ fees 173 List of all information published by the Group and made public in the last twelve months 196

5

2017 Registration Document — THALES 251 252 THALES — 2017 Registration Document This document was printed by an Imprim’vert labeled printer on PEFC-certified paper.

Photo credits: © Thales Design and production: Agence Marc Praquin facebook.com/thalesgroup

twitter.com/thalesgroup

linkedin.com/company/thales

youtube.com/thethalesgroup

Tour Carpe Diem – Place des Corolles – Esplanade Nord 92400 Courbevoie France Tel.: +33 1 57 77 80 00 www.thalesgroup.com